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CBI raises GDP due to increase in household spending and business investment

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The business group is forecasting 2.6 per cent GDP growth for 2015, up from 2.4 per cent in June – with a further increase to 2.8 per cent expected in 2016. As a result of this “growth momentum” it now expects an interest rate hike in the first quarter next year, compared to its previous prediction of the second quarter.

It said the upgrade was due to a combination of factors, including signs of recovering productivity in the first half of this year, feeding through to stronger wage growth and continued low inflation from falling commodity prices.

This, the CBI said, had given a “welcome boost” to household spending.

In addition, business investment is also said to “likely remain healthy,” with businesses developing “robust plans for capital spending”. It is predicting a 6.5 per cent growth in business investment next year.

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As a result the CBI said it expected a “decent” growth of 0.7 per cent per quarter until the end of 2016.

It said domestic growth looked solid but did not expect UK GDP to be boosted from global demand.

“While immediate euro zone risks appear to have receded compared with earlier in the year, a weaker outlook for China will weigh on global growth and a strengthening pound will eat into UK export competitiveness,” the CBI said. “Meanwhile, downside risks to emerging market growth appear to have intensified.”

As a result it expects net trade to drag on GDP growth in both 2015 and 2016.

John Cridland, CBI director-general, said: “We’re encouraged by the twin engine-growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment. But the outlook on exports is somewhat muted, the strong Pound is hampering our competitiveness abroad and growth in the euro zone will remain subdued for the foreseeable future, particularly given renewed uncertainty.”

Cridland suggested interest rates would rise to 0.75 per cent in the first quarter of 2016 and then rise at a slow pace thereafter. That is ahead of its previous prediction for the second quarter.

Rain Newton-Smith, CBI director for economics, also warned of pipeline inflationary pressures.

“They are building due to stronger domestic demand and recovering wage growth,” Newton-Smith said. “Our members are talking more about capacity constraints and skills shortages. The first quarter of 2016 is the time for that first, very gradual increase in UK interest rates.”

It expects consumer price inflation to remain below one per cent through to the end of this year but from then on rising more quickly, to reach 1.8 per cent by the end of 2016.

Regarding the global economy. Newton-Smith said: “We’ve revised down our exports forecast for 2016 but it is important to remember that even if China only grew by five per cent this year – that’s the same as adding an economy the size of Belgium to the global economy each year. And China’s transition away from credit-fuelled investment growth to a more consumer-oriented economy provides plenty of opportunities for British businesses.”

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