Capital spending is set to fall away in the second half of 2023 as the super-deduction ends, which is why the CBI has been calling for a permanent investment incentive to buttress growth into next year.
Meanwhile, the CBI expects a small rise in the unemployment rate – ending 2023 at 4.1% – as weaker economic growth weighs on hiring. Nonetheless, this still marks a relatively tight labour market, with many firms presently carrying vacancies.
Exports continue to underperform compared with our international peers, remaining 10% below their pre-COVID level at the end of 2023.
Rain Newton-Smith, CBI Chief Economist, said:
“This is a tough set of statistics to stomach. War in Ukraine, a global pandemic, continued strains on supply chains – all preceded by Brexit – has proven to be a toxic recipe for UK growth.
“The bottom line is that the outlook for UK exports remains far worse than our worldwide competitors. This has got to change for the better.
“Business and government must work together to seek growth globally. As demand shrinks, competition for revenue increases. UK business must be more confident in identifying new markets and utilising all the tools at their disposal – be it from the private sector or public sector.
“Government also has an integral role to play. Against the backdrop of the rising cost of doing business and continuing supply chain pressures, easing trade flows is in everyone’s interests. It’s not just about lowering non-tariff trade barriers in Europe and signing FTAs.
“Post-Brexit regulatory reforms to support growth, innovation and sustainability can build competitiveness. But divergence for the sake of it could introduce further red tape and friction undermining that mission.
“Moreover, we can and must do more domestically to help our exporters too. Now that R&D allocations are known, let’s get that funding out the door quickly to the Advanced Research and Invention Agency and others.”
Key forecast data
Jobs & household spending
- Household spending is set to grow by 3.5% in 2022 and fall by 0.4% in 2023. In quarterly terms, household spending falls persistently from Q2 2022 to Q1 2023, before returning to growth.
- The main driver of weakness in spending is high inflation. CPI inflation is expected to stay elevated this year, rising to another peak (of 8.7%) in October. It will gradually fall back, settling towards the Bank of England’s 2% target in December 2023 (1.9%).
- High inflation means real household disposable incomes fall by 2.3% over 2022 – marking the largest annual decline on record (since the mid-1950s)
- We also expect a mild rise in unemployment in our forecast, as weakening economic growth weighs on the labour market. The unemployment rate rises to 4.1% by the end of 2023 (from its current level of 3.7%), which nonetheless suggests a still-relatively tight labour market.
Long-term outlook
- We expect business investment to grow until mid-2023, buoyed by the government’s super-deduction.
- However, business investment falls thereafter, as the super-deduction ends and weaker growth bites. Business investment ends our forecast 7% below its pre-COVID level (in Q4 2019).
- By the end of 2023, we expect GDP to still be 5% below its pre-COVID trend.
- Weak activity means that productivity growth stays lacklustre over our forecast. Output per worker only returns to its anaemic pre-COVID trend and remains 17% below its pre-2008 trend at the end of 2023.
Global outlook
- Following the large drag in Q1, we expect net trade to contribute positively to GDP growth throughout our forecast. However, this mostly reflects weak imports growth – which is hit by sluggish domestic demand – rather than strong exports growth.
- Recovery in exports is lacklustre over our forecast, reflecting softer global growth and trade, and a weak starting point for our projections. By the end of 2023, we expect UK exports to still be 10% below their pre-COVID level.
- Global GDP growth (in purchasing power parity terms) is predicted to be 3.1% in 2022 and 3.4% in 2023 – a substantial downgrade from our previous forecast (4.7% and 3.8%).
- We have downgraded our global GDP forecasts across the board this year, reflecting a weak start to the year (partly due to the Omicron wave) and high inflation hitting household incomes and spending across the world.
