Rising costs, falling GDP and capital crunch may derail UK's recovery, CBI warns

Business investment appetite has recovered during the year, spurred by renewed economic growth as the country reopened from a series of lockdowns. Photo: Victoria Jones/PA via Getty Images

The UK’s recovery from the coronavirus pandemic is riddled with challenges, one of which is the need for further business investment, an industry body said on Monday.

In its latest economic forecast, the Confederation of British Industry (CBI) said short-term headwinds, such as rising costs and supply chain shortages, have grown since its previous forecast in June.

This means that long-term challenges and poor productivity continue to underline the need for a booster for business investment to support sustainable growth, it said.

Business investment appetite has recovered during the year, spurred by renewed economic growth as the country reopened from a series of lockdowns.

In the economic forecast, business investment appetite is predicted to rise briefly above its pre-pandemic level at the end of 2022, growing by 8.2% over the year as a whole.

However, this recovery is short-lived, with capital spending falling from mid-2023, as the super-deduction comes to an end and the rise in corporation tax begins. As a result, business investment will continue to lag other advanced economies, the research showed.

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The CBI has also predicted for GDP growth to come in at 6.9% this year, 5.1% next year, revised down from 8.2% and 6.1%, respectively.

It also expects figures of 3% in 2023, while the unemployment rate is estimated to fall back to 3.8% at the end of 2023.

However, it does expect supply chain frictions to largely dissipate by the middle of next year as the government-formed supply chain advisory group continues to tackle the issue.

Overall, household spending remains the key driver of GDP growth, generating 90% of growth in 2022, and two-thirds in 2023, the data also found. This is supported by a further improvement in real income, and households running down excess savings accumulated during the pandemic.

“The resilience of the UK’s labour market has been a real success story, thanks largely to the government’s job retention scheme, which helped stave off potentially large-scale job losses,” the CBI said.

The recovery in exports is also expected to be lacklustre, following disappointing growth over this year so far.

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The forecast predicts CPI inflation to peak at 5.2% in April next year, above the Bank of England’s (BoE) 2% target until Spring 2023, which will hit pay packets and consumer spending.

“The challenge for January 1st is now very clear for the UK economy. Significant headwinds and rising costs of living threaten the extent of recovery and prospects for economic success. These hurdles for firms will provide a major test for the government – can they foster sustainable UK investment and growth?” said Tony Danker, CBI director-general.

“The UK’s New Year resolution must be to give firms the confidence to go for growth. We should be raising our sights on the economy’s potential and seizing the moment.”

He added: “But this isn’t just a challenge for the government. It’s also up to businesses to step up and be part of the solution. Investment in technology and skills are among the most important steps firms can take now that will power productivity growth.”

Watch: What is inflation and why is it important?

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