CBI ups UK growth forcast but warns of rate rises

The news came after the business lobby group upgraded its forecasts for the rest of 2015 and on into next year.

Following the review, the CBI said that it now expects growth of 2.6 per cent this year, up from its June forecast of 2.4 per cent, while the projection for 2016 was increased to 2.8 per cent from 2.5 per cent.

The CBI said it had up-ed its forecasts as a result of better productivity in the first half of this year which is starting to feed through to stronger wage growth in some parts of the economy.

“Strong domestic demand and upbeat official data since our last forecast has boosted our outlook for 2015. We expect this strength to continue into next year,” said CBI director for economics Rain Newton-Smith.

The CBI now expects interest rates to rise in the first quarter of next year.

In June, it had expected rates to begin rising from their historic low of 0.5 per cent from the start of April next year.

But it now says the improved growth picture alongside “more hawkish” comments from the Bank of England’s rate-setting Monetary Policy Committee had prompted it to bring its prediction forward.

“We now expect interest rates to rise to 0.75 per cent in the first quarter of 2016, and then rise at a slow pace thereafter,” the CBI said.

The CBI said it expected growth until the end of next year to continue at a similar pace to the three months to the end of June, averaging 0.7 per cent a quarter.

Household spending and business investment would remain the two key factors driving growth next year, it added.

It said improved productivity had also helped to boost wage growth.

This combined with low inflation, largely due to the drop in commodity prices, meant households had more to spend, the CBI said.

However the CBI did warn that export markets may continue to be a drag for the immediate future.

Even though the risks from the eurozone have “receded” slightly growth there would remain “subdued for the foreseeable future”. A weakening outlook from China and some other emerging markets along with a strengthening pound could affect trade well into 2016, the CBI added.

John Cridland, CBI director general, said: “We’re encouraged by the twin engined-growth of household spending, spurred by stronger wage increases and low inflation, buttressed by business investment. We’re also seeing tentative signs of productivity picking up.”

He added: “The outlook on exports is somewhat muted: the strong pound is hampering our competitiveness abroad and growth in the eurozone, our biggest trading partner, and will remain subdued for the foreseeable future, particularly given renewed uncertainty.”