Economic forecasters have slashed expectations for Britain’s recovery and said further pain could follow, depending on the severity of the Omicron variant of Covid-19 and government action to avoid a “cliff edge” for business investment.
The Confederation of British Industry, the UK’s leading business lobby group, said in June that it expected the economy to expand by 8.2%.
But on Monday it cut that prediction to 6.9% and revised down its 2022 forecast from 6.9% to 5.1%.
It put the more pessimistic outlook down to weaker-than-expected output since its last forecast, with supply chain disruption among the factors that has placed a drag on the economy.
The accounting firm KPMG issued an even gloomier prediction, saying it expects growth to reach 4.2% next year at best, even if the Omicron variant turns out to be a “false alarm”.
It said any increased restrictions imposed by government to stop the spread of the variant will further hamper the recovery.
Growth would slow to 2.6% if moderate measures such as social distancing are required, KPMG predicted, while output could fall to 1.8% if vaccines prove ineffective against Omicron and lockdowns are imposed during January and February.
Both KPMG and the CBI also raised concerns about a lack of business investment, which they cited as obstacle to a sustained recovery in the longer term. Fresh government action will be needed to avoid a steep fall in business investment in 2023, when temporary measures to help business are withdrawn, the CBI said.
“The UK’s new year resolution must be to give firms the confidence to go for growth,” said the CBI’s director general, Tony Danker.
“We should be raising our sights on the economy’s potential and seizing the moment. I know from speaking with firms of all sizes that they have an ambitious investment mindset and are anxious to implement growth plans.
“But while intentions have thawed, we’re coming up to a cliff edge in 2023.”
The CBI cited the Treasury’s plans to remove the “super deduction”, a £25bn tax break allowing them to claim 25p in relief for every £1 they spend on plant and machinery, as well as a planned rise in corporation tax, from 19% to 25%.
“As a result, business investment will continue to lag [behind] other advanced economies,” the employers’ lobby group said.
Jon Holt, the chief executive of KMPG UK, echoed the concerns. “Long-term economic growth remains reliant on the UK’s ability to increase productivity, decrease uncertainty and give businesses the confidence they need to invest,” he said.
“We need to create the conditions to accelerate companies’ investment in technology and power the UK’s recovery.”
The CBI also said the recovery in exports is likely to be lacklustre following what it described as disappointing growth over this year so far.
Household spending would remain the key driver of the economy, the employers’ organisation said, generating 90% of growth in 2022, and two-thirds of gross domestic product in 2023.
Consumer spending would be supported by households running down excess savings accumulated during the pandemic.
It predicted unemployment would rise only slightly as a result of the winding-up of the government’s furlough scheme and the jobless rate would return to its pre-crisis level of 3.8% by the end of 2023.
Rain Newton-Smith, the CBI chief economist, said: “We expect a pretty firm economic recovery ahead, though understandably the emergence of Omicron poses another downside risk to our forecast. Ultimately this underscores the need for equitable distribution of vaccines across the world – supporting lives, livelihoods and freeing our international travel sector, boosting trade too.”
The CBI expects current supply-side constraints to ease by the middle of next year, with inflation peaking at just over 5% in April.
Despite the risks from inflation, KPMG said uncertainty about Omicron meant that the Bank of England was unlikely to raise interest rates this December. However, it said rates are likely to rise to 1-1.25% by the end of 2023 to prevent a ratcheting up of wage growth as the recovery gathers renewed momentum.