The CBI has upgraded its growth prediction for 2015 in its latest economic forecast against a backdrop of lower oil prices and inflation.
Job creation continues apace and wage growth is finally picking up. Coupled with low inflation, this will give a boost to real household incomes, going some way to improving living standards. Lower energy prices are also feeding through to lower operating costs for companies, leaving more space for investment.
The brighter picture for growth this year of 2.7% (from 2.5% expected in November) also reflects the likelihood that the MPC won’t raise interest rates until early next year, helping to support growth of 2.6% in 2016.
But political volatility, both domestic and foreign, continues as the UK general election approaches, Greece’s fiscal position remains in the spotlight and instability continues in Ukraine. As a result, exporters are finding it harder to secure orders and net trade is unlikely to provide much of a boost to growth over the next two years.
Sterling’s recent high against the Euro also adds to the challenges for manufacturing securing further export orders.
However, while lower oil prices are keeping costs down for businesses and consumers, the North Sea oil companies are suffering, harming jobs and investment in the industry.
The price of oil is expected to remain below $65 per barrel by the end of 2016. On the back of lower oil prices, consumer price inflation is expected to stay below 1% throughout most of 2015.
While the risk of deflation is growing, the CBI does not see a sustained period of widespread falling prices as likely, with the downward pressure from the oil price effect unwinding over time.
Alongside household spending, business investment is expected to continue providing sturdy support to GDP growth, rising by 5.8% this year and by 6.5% in 2016 as the UK’s expansion becomes further embedded.
In contrast, the UK’s export performance has remained disappointing. The CBI expects some improvement ahead, with growth increasing from 2.9% this year to 5.5% in 2016. But with import growth set to rise firmly due to strong domestic demand, the net trade contribution to GDP growth will be small at best.
More positively, the UK unemployment rate is expected to continue its downward trend in 2015 and into next year, levelling off at 5.2%, while wage growth is expected to reach 3.0% by Q4 2016.
Now is not the time for complacency, but falling unemployment coupled with improving wage growth and rock bottom inflation should mean that people see more money in their pockets.
Regional director - North East