CBI calls for more public investment in businesses amid bleak economic forecasts

With less than 40 days to go until Parliament is suspended, the countdown is on for the Prime Minister and Chancellor to take the vital steps needed to avoid tipping the country into recession, according to the latest CBI economic forecast.

With the cost of living crisis showing no signs of abating, airports struggling to cope, nationwide rail strikes on the horizon and ‘Groundhog Day’ battles with the EU over of the Northern Ireland Protocol, there is a real risk that the economy will remain a “second after politics” this summer, according to the CBI report.

Growth has been reduced to 1% in 2023 due to weaker consumer spending: real household incomes are expected to fall at their fastest pace since the 1950s. With this looming household recession, the investment in businesses is even more critical, the CBI said.

The CBI outlook suggests growth will slow as household spending declines amid sluggish business and consumer confidence. As a result, the CBI has significantly revised its GDP growth outlook down to 3.7% in 2022 (from 5.1% from the previous estimate) and 1.0% in 2023 (from 3 .0% previously).

High inflation is the main source of weaker growth. Consumer price index (CPI) inflation hit a 40-year high in April (9%), driven by a cocktail of challenges – ranging from supply chain pressures, rising commodity prices and the war in Ukraine.

Inflation is expected to remain elevated through the autumn, hitting a new high in October (8.7%) in light of the highly anticipated second hike in 2022 of Ofgem’s energy price cap. The result is a historic compression of household incomes, which will inevitably lead to lower consumer spending. This, in turn, will weaken GDP growth towards the end of this year and into the first half of next year.

Tony Danker, chief executive of the CBI, said: “Let me be clear – we expect the economy to be roughly flat. It won’t take much to tip us into a recession. Even if we don’t, it will be one for too many people.

“Times are tough for businesses facing rising costs and for low-income people anxious to pay their bills and put food on the table.

“It’s clear as day that business investment is one of the few bright spots in our economy. The “super deduction” is one of the only reasons we’ve dismissed the threat of recession for now – there must be a permanent successor.

“We’ve had weeks of politics, with the country on the brink of a summer of lockdown. There is only a small window to recess. Inaction this summer would set in stone a stagnant economy in 2023, with the recession a very serious concern.

“We need to act now to build trust. It can’t wait any longer.

The CBI recommends a series of actions for the government to take this summer:

  • Building momentum for business investment ahead of the fall budget, fully committing to a permanent super-deduction successor and cutting approval times for new offshore wind farms from four years to one year.
  • Boosting confidence in the economy, with immediate talks to finally resolve the Northern Ireland Protocol impasse and push forward Brexit, resisting unilateral action and instead both sides working to find a negotiated outcome; act as an honest broker between the rail companies and the unions to find solutions to avoid a summer of rail chaos and announce a permanent replacement for the recovery loan program to support cash flow.
  • Take immediate action to alleviate labor and skills shortages, with real movement on a new list of shortage occupations, adding more sectors with obvious shortages, such as aviation, and adding a immediate flexibility to the apprenticeship levy for one year, allowing all employers nationwide to use their levy funds to address labor shortages.

Capital spending is expected to decline in the second half of 2023 when the super-deduction ends, hence the CBI’s calls for a permanent investment incentive to support growth next year.

Meanwhile, the CBI expects the unemployment rate to rise slightly – ending at 4.1% in 2023 – as weaker economic growth weighs on hiring. Nevertheless, this still marks a relatively tight labor market, with many companies currently having vacancies.

Exports will continue to underperform the UK’s international counterparts, the CBI said, remaining consistently 10% below their pre-Covid level by the end of 2023.

CBI Chief Economist Rain Newton-Smith said: “This is a tough set of statistics to bear. War in Ukraine, a global pandemic, continued strains on supply chains – all preceded by Brexit – have proven to be a toxic recipe for UK growth.

“Ultimately, the outlook for UK exports remains far worse than that of our global competitors. This must change for the better.

“Business and government must work together to seek growth globally. As demand decreases, competition for revenue increases. UK businesses need to be more confident in identifying new markets and using all the tools at their disposal, whether private or public sector.

“The government also has a vital role to play. In an environment of rising cost of doing business and continued pressures on the supply chain, smoothing trade flows is in everyone’s interest. 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 boost competitiveness. But a divergence for the sake of doing so could introduce more bureaucracy and friction, undermining that mission.

“Furthermore, we can and must do more at the national level to also help our exporters. Now that the R&D allocations are known, let’s quickly shift that funding to the Agency for Advanced Research and Invention and others.

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