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General election and possible EU exit “causing anxiety” for business investment

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The ICAEW, which represents around 144,000 chartered accountants worldwide, said it had downgraded its latest growth forecast from 2.5 per cent to 2.4 per cent for this year.

It said British firms were “scaling back growth in capital spending” because of concerns about which party or parties will form the next government and what its policy towards business will be.

It added: “In light of continuing problems in the euro zone and a general election ahead, businesses are exercising caution. This is hampering efforts to build a trade and investment-led recovery.”

ICAEW expects business investment to slow further in the weeks ahead particularly in the oil and gas industry, which has been battered by plunging prices in recent months. Businesses were also reporting skills shortages greater than experienced in recent years which could further constrain growth.

In contrast, the ICAEW added, British consumers were “leading the economic recovery” boosted by the benefits of low inflation, lower oil and commodity prices and above average inflation wage growth which will see the average employee nearly £400 better off this year. The unemployment rate was also improving with the ICAEW forecasting an average of 5.2 per cent in 2015 in line with the level seen before the financial crisis and an improvement on its latest forecast of 5.5 per cent.

Despite the optimism the ICAEW warned that “policy makers should look to avoid rising levels of consumer debt to ensure the UK does not return to a similar situation before the financial crisis”.

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Michael Izza, ICAEW’s chief executive, said: “The potential slowdown in GDP growth is a clear sign that UK firms are pressing the pause button on their attempts to drive economic growth. Their exposure to international risks, ranging from the eurozone crisis to China’s cooling economy, has subdued their capital spending plans for the year ahead. We cannot overstate the effect of the general election either. Businesses remain concerned about the potential make-up of the next government and its policy towards business. Any steer towards a potential exit from the EU is also causing anxiety.”

Scott Corfe, ICAEW’s economic adviser added that the recovery continued to be built on domestic demand rather than the more “substantial footing” of investment and international trade. 

“With capital spending growth expected to slow this year, from a low base compared with other comparable countries, a rebalance economy isn’t going to emerge anytime soon,” he warned. “We do not expect the Bank of England to raise interest rates until the end of 2015 at the very earliest, and combined with low inflation it means that consumer spending will continue to drive the recovery. Although the average worker may be nearly £400 better off this year, they will still need to make up a lot of ground to reach 2007 levels. So the government must ensure that policies are put in place to boost investment, and exports, so that we are less reliant on consumer expenditure.”

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