The UK economy will continue to grow over the next two years but at a slower pace than expected, the Confederation of British Industries (CBI) said on Monday (16 May).
The CBI now expects Britain's gross domestic product to expand at a 2% rate in 2016 and 2017, compared with its last forecast in February which predicted growth of 2.3% and 2.1% respectively. The downgrade in expectations comes amid signs that global economic risks, including uncertainty ahead of the European Union referendum, are starting to weigh on investment plans.
"A dark cloud of uncertainty is looming over global growth, particularly around weakening emerging markets and the outcome of the EU referendum, which is chilling some firms' plans to invest," said Carolyn Fairbairn, CBI director-general. "At present, the economic signals are mixed – we are in an unusually uncertain period."
In its report, the CBI said it expects household spending to remain a major driver of economic growth. However, spending is expected to ease to 2.5% this season and to 1.5% in the next 12 months, partly because of rising inflation over the course of the next two years, which will blunt growth in real incomes.
Despite the expected slowdown, household spending is predicted to account for around 80% of growth in 2016, and approximately 50% in the following year. Meanwhile, investment spending is expected to ease in the near-term future, amid signs that referendum uncertainty is having a negative impact on plans for capital spending.
A recovery in investment is expected in the second half of 2016, such that business investment remains a key support to GDP growth over the forecast period, accounting for around a quarter of growth in 2016, and a third in 2017.
CBI economics director, Rain Newton-Smith, said a combination of subdued growth and low commodity prices meant that, in all likelihood, the Bank of England (BoE) will not hike interest rates until next year.
"With GDP growth softening and commodity prices still low, inflationary pressures remain muted," he said. "Referendum uncertainty also appears to be dampening some activity in the near-term, and so put altogether, we do not now expect to see a rise in interest rates before 2017."
Last week, the BoE voted 9-0 in favour of keeping interest rates at a near-historic low of 0.5% and also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375bn (€470bn, $530.6bn).
Threadneedle Street officials cautioned there were increasing signs that uncertainty associated with the European Union referendum has begun to weigh on activity and could lead to a sharp fall in the value of the pound and to higher unemployment.
"Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise," the Monetary Policy Committee said in the minutes to its May meeting.