Business group CBI predicts economic growth will start to slow

Business group CBI says the economy is on "solid ground" but points out potential pitfalls ahead

CBI Director General John Cridland
CBI Director General John Cridland

Economic growth will slow in the second half of the year as the effect of improved confidence and better credit conditions starts to wear off, the CBI has predicted.

The business group said the recovery was “on solid ground” but expected expansion to ease to 0.7% in the third quarter and 0.6% in the final three months of the year, after growth of 0.8% in each of the first and second quarters.

It also warned of political risks including the possibility of a Scottish yes vote on independence - described as a “one-way ticket to uncertainty”.

Ahead of next year’s general election, the CBI expressed concern about the possibility of a Labour government intervening in the energy sector and other markets - but insisted it was non-party political and was also “not very keen” on the Tories’ migration targets.

The CBI’s forecast for gross domestic product (GDP) growth for this year and next remained unchanged at 3% and 2.7%.

It said the recent period of accelerating growth would ease as the initial impact of business and consumer confidence, improving credit conditions and reductions in uncertainty started to wear off.

The slowdown also reflected weakness in productivity and wage growth, the CBI said, but added that it expected a gradual improvement, predicting average earnings to increase by 1% this year and by 2.4% in 2015.

Its view that signs of a pick-up in pay growth would be needed before an interest rate hike backed the stance of Bank of England governor Mark Carney, who led most of the rate-setting Monetary Policy Committee in not voting for a rise last month.

CBI director-general John Cridland also brushed off suggestions that Mr Carney’s apparent changes of tack on when rates would rise were confusing, saying businesses understood his approach.

Mr Cridland said: “The UK’s recovery is on solid ground, with our quarterly growth on average outstripping G7 competitors over the last year. For the rest of the year, we expect growth to get onto a more even keel and the recovery to become further entrenched next year.

“Business investment has been growing better than expected so far this year, but it still has a lot of catching up to do to get back to its pre-crisis level.

“Although hundreds of thousands of new jobs are being created in the economy, there is little upward pressure on starter salaries outside a few hot spots, such as in parts of the IT sector. For longer-term staff though, awards are often a little higher. We expect wages to pick up across the board next year as the recovery continues.”

A separate CBI survey showed economic growth slowed in the three months to August, with the reading at a five-month low of plus 21%.

But expectations for the next quarter remained strong.

Mr Cridland said heightened tensions in Ukraine and the Middle East added to risks such as higher commodity prices and global market instability.

With party conference season approaching, he urged politicians in the UK “to focus on the UK’s long-term economic security, not just on winning the political race”.

Mr Cridland urged parties to commit to adopting the outcome of the Davies commission on airport capacity, saying businesses were “not going to accept cherry-picking” of the proposals and wanted to see “diggers on the ground before 2020”.

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