Government must act on business investment to avoid recession

With less than 40 days until parliament goes into recess, the countdown is on for the prime minister and chancellor to take the vital actions needed to spare the country from dipping into recession, according to the latest CBI economic forecast.

With the cost-of-living crunch showing no sign of abating, airports struggling to cope, national rail strikes on the horizon and Groundhog Day battles with the EU over the Northern Ireland Protocol, there is real risk that the economy stays a ‘distant second to politics’ this summer.

The CBI’s outlook suggests growth will soften as household spending turns downwards amid dented business and consumer confidence. As a result, the CBI has downgraded its GDP growth outlook significantly, to 3.7% in 2022 (from 5.1% previously) and 1.0% in 2023 (from 3.0% previously).

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

Inflation is expected to remain high into Autumn, rising to another peak in October (8.7%), given a likely rise in Ofgem’s energy price cap. The result is a historic squeeze in household incomes, which will 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, CBI director-general, said:“Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.

“Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.

“It’s as clear as day that business investment is one of the few bright spots left in our economy. The Super Deduction is one of the only reasons we have staved off the threat of recession for now – there must be a permanent successor.

“We’ve had weeks of politicking with the country standing on the brink of a summer of gridlock.

“There is only a small window until recess. Inaction this summer would set in stone a stagnant economy in 2023, with recession a very live concern.

“We need to act now to install confidence. This can wait no longer.”

What needs to be done this summer

Build momentum behind business investment ahead of the Autumn Budget:

1. Make a full commitment to a permanent successor the super-deduction
2. Cut approval times for new offshore wind farms from 4 years to 1 year

Boost confidence in the economy:

3. Call for immediate talks to finally resolve the Northern Ireland Protocol impasse and get Brexit done – resist unilateral action with both sides getting on with the job of finding a negotiated outcome
4. Act as an honest broker between rail companies and unions to find solutions to avoid a summer of train chaos
5. Announce a permanent replacement to the Recovery Loan Scheme to support cashflow

Take immediate steps to alleviate labour and skills shortages:

6. Get real on industry concerns over labour shortages – get going on a new shortage occupations list and add sectors with obvious shortages, like aviation, until that review can be completed.
7. Add immediate flexibility to the apprenticeship levy for one year allowing all employers in the country to use their levy funds to tackle labour shortages.

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.

13/06/2022