CBI: UK Economy On A Firm Footing

Low inflation is temporary but prepare for more bond market volatility, says private sector association

Editor, etf.com Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

The UK is on a firm economic footing, according to the Confederation of British Industry, but businesses should prepare for more bond volatility.

With retail and service sectors performing well, John Cridland, CBI director-general, expects to see “solid, steady and sustainable growth” of 2.5 percent this year carrying through to 2016 and increasing to around 2.6 percent. This is a downgrade of its forecast in February of 2.7 and 2.6 percent respectively due to weaker than expected GDP growth in the first quarter, which the CBI believes is a “temporary blip”.

Cridland, who acts upon a mandate from about one third of the UK private sector workforce, also forecast inflation to average 0.2 percent this year, but to rise fairly quickly from late 2015 as the effects of falling oil and food prices feed through into the system, reaching 1.6 percent in 2016.

Temporary low inflation means the Bank of England has “more wiggle room” and will likely only raise interest rates in the first quarter of 2016, he said.

“With our members more upbeat than recent official figures would suggest, the UK economy seems to be on a firm footing,” he told press on Friday.

Rain Newton-Smith, director of economics at the CBI, encouraged businesses to have the right risk-management plans due to increasing bond volatility in the capital markets.

“[As] interest rates in the U.S. and eventually here in the UK start to rise we could see more volatility in bond markets and that’s something people should be factoring into their business plans,” she said.

When it comes to the EU referendum, planned for 2017, Cridland said the CBI wishes to stay within a reformed EU, which had less control over “lifestyle regulation” – like imposing limits on working hours – but which did not reduce the free movement of labour.

“Our destiny is not the destiny of the Eurozone,” he said. “The Eurozone needs to integrate more – good luck to it – but we’re not going to do that, and we need that to be recognised by other European governments, publicly and openly.”

Although not in favour of an early referendum, Cridland said there was no “material evidence” that UK businesses had halted or delayed investment in the meantime.

Newton-Smith projected Europe’s growth to rise from 0.5 percent this year to 0.8 percent in 2016, with the threat of financial instability in Greece casting a shadow over the region.

“It’s [Greece] a concern that if we were not to reach a deal, that could lead to financial contagion,” she said. “That means the cost of borrowing for governments and business cross the Eurozone [could rise]. If we saw a sharp rise in that, that would have an impact in the UK. That’s why we think it’s important to reach a deal.”

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.