Business development · 19 March 2018

Consumer spending set to lift economy but low investment leaves UK trailing

Manufacturing exports
UK manufacturing is set to grow by 1.4 per cent in 2018
The British Chambers of Commerce (BCC) believes a rebound in consumer spending will drive a stronger than expected UK economic uplift over the next two years.

But it warned that a lack of investment and low skills levels will keep it trailing other major economies.

The BCC raised its growth forecast for UK GDP from 1.1 per cent to 1.4 per cent this year and from 1.3 per cent to 1.5 per cent for 2019. Its first forecast for 2020 is for 1.6 per cent growth.

It said its upgrade was largely boosted by slightly stronger than expected levels of consumer spending.

The UK’s export performance is also expected to remain robust, it said, on the back of strong global growth particularly the Eurozone and US. Imports are also likely to grow at a good rate meaning the contribution of net trade to UK GDP growth is to be limited.

The BCC said the services sector would grow from 1.3 per cent to 1.5 per cent this year, with manufacturing set to grow by 1.4 per cent. Construction growth will hit 1.1 per cent this year and 1.4 per cent in 2019.

Despite the upgrades, the BCC warned that UK GDP growth will remain well below the historical average and ensure it remains among the worst performing economies in the G7, including nations such as the US, Japan, France and Italy, until 2020 at the earliest.

Productivity is expected to improve marginally over the forecast period but will remain subdued, hampered by what the BCC called deep rooted problems in the economy, including skills shortages and chronic underinvestment in the UK’s infrastructure.

The BCC believes inflation has now peaked and will begin easing in the near term as the impact of the post-EU referendum slide in sterling fades. While average earnings are now expected to grow by slightly more than expected, real earnings growth is not expected to return to positive territory until 2019.

“Sustained skills and labour shortages are a real issue.”

It predicted that the next increase in UK official interest rates, to 0.75 per cent, will occur in Q2 2018, followed by another rise in the first quarter of 2019.

while many individual businesses are doing well, the inescapable conclusion from our forecast is that the UK economy as a whole should be performing better than it is, given robust and sustained global growth, said Dr Adam Marshall, director general of the BCC.

although strong global conditions have given the UK a bit of a boost through higher export demand in recent months, we have serious concerns about the potential for further growth here at home when the performance of key trading partners slows. Sustained skills and labour shortages are also a real issue, with businesses reporting significant difficulties recruiting and retaining the people they need.

Marshall reiterated his views that government needs to concentrate on fixing fundamentals in the economy such as connectivity, infrastructure, training, immigration, procurement and business costs.

this would give rise to a wave of investment and significant productivity improvements, he added.