THE CBI has upped its forecast for the UK economy, saying the “twin engines” of rising household spending and robust business investment will power additional growth.
The business organisation raised its gross domestic product (GDP) forecasts for the UK to 2.6 per cent this year and 2.8 per cent in 2016, up from its June estimates when it forecast 2.4 per cent and 2.5 per cent.
It said continued low inflation from falling commodity prices gave a welcome boost to household spending.
The CBI said it expected GDP growth to average 0.7 per cent a quarter until the end of 2016 - matching the pace of growth in the second quarter this year, when it bounced back after slowing to 0.4 per cent in the first three months of 2015.
Alongside stronger household spending at 3.2 per cent, business investment growth this year has been revised up to 6.2 per cent from 4.5 per cent, following better than expected first quarter data from other CBI reports pointing to upbeat capital spending in the year ahead.
The CBI added that household spending and business investment are set to remain key drivers of growth next year, rising by 2.9 per cent and 6.5 per cent respectively.
However, the CBI does not expect the economy to be supported by export growth, principally due to the strong pound and a weaker outlook for China.
CBI director-general John Cridland said: “We’re encouraged by the twin engined-growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment.”
But he added: “The outlook on exports is somewhat muted - the strong pound is hampering our competitiveness abroad and growth in the eurozone, our biggest trading partner, and will remain subdued for the foreseeable future, particularly given renewed uncertainty.”
The CBI said net trade remains weak, and estimated it would be a drag on growth over the forecast period, turning in a minus 0.3 per cent contribution this year, and minus 0.1 per cent next year.
It said following more hawkish comments from the Bank of England recently, combined with added impetus in the economy, it expects interest rates to rise to 0.75 per cent in the first quarter of 2016 from the current historic low of 0.5 per cent, where they have been since 2009.
This is earlier than its previous prediction of an increase in the second quarter of next year. In the US, the CBI said, the Federal Reserve looks likely to raise interest rates before Christmas.
CBI director for economics Rain Newton-Smith said: “Pipeline inflationary pressures are building, due to stronger domestic demand and recovering wage growth.
“Our members are talking more about capacity constraints and skills shortages.
“Along with more hawkish noises from the Bank of England’s Monetary Policy Committee, we now expect the second quarter of 2016 is the time for that first, very gradual, increase in interest rates here in the UK.”
The CBI added the UK’s labour market has sent mixed messages over the last couple of months, with employment falling and unemployment rising, while wage growth continues to improve.
On Friday, the Office for National Statistics will to publish its second estimate for second quarter GDP, with economists widely expecting an unchanged reading of 0.7 per cent.
Last week Chancellor George Osborne hailed a bumper month for tax receipts as the UK’s public sector finances posted a July surplus for the first time since 2012.