Growth warning as Britain’s economic woes continue

Britain is facing a “lost decade” of growth unless the country tackles its economic challenges.

The CBI has warned after a turbulent year both politically and economically, the CBI’s outlook for the economy “strikes a sombre tone as we go into 2023”

Its  director general Tony Danker (pic) warned the country needed to act if it were not to suffer long term consequences.

“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment,” he explained. “Firms see potential growth opportunities but a lack of ‘reasons to believe’ in the face of headwinds are causing them to pause investing in 2023. Government can change this. Their action or inaction to support growth and investment will be a key determinant of whether recession is shallow or deep.”

“We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity”

“There is no time to waste. The prime minister and chancellor must use levers of growth to ensure this downturn is as short and shallow as possible, but also to address the persistent weakness in investment and productivity. We cannot afford to have another decade where both are stagnant.”

The CBI outlook said economic growth can only come from increasing productivity and maximising our workforce. “When fiscal and monetary policy is tight, Government must use all levers at their disposal to move the UK economy beyond this current trajectory,” it added.

This includes addressing skill and worker shortages and unlocking business investment through capital allowances and regulatory changes, such as removing the de facto ban on onshore wind, improving mobility to facilitate trade in services and updating the national planning policy framework.

“With three-quarters of firms facing shortages, we need a joined-up plan that addresses this,” The CBI said. “This should include co-ordinated action to enable upskilling and automation across businesses to ease pressures, as well as reducing economic inactivity, supported by a more flexible immigration system.

“In addition, Government must act now to boost business investment and when the fiscal environment allows, they should look to introduce a permanent full allowances regime to unlock an extra £50 billion in capital investment per year by the end of the decade.”

It warned the economy is likely to have fallen into a recession in Q3 2022, when GDP shrank by 0.2%. the CBI said it expected the recession to last until the end of 2023 – as a result, it has downgraded our GDP growth outlook significantly, to -0.4% in 2023 (from 1.0% in our last forecast).

The outlook improves in 2024, when the economy grows by 1.6%, thanks to inflation falling back further and the squeeze on household incomes alleviating. The recovery in household spending also lifts business and residential investment.

But despite the return to growth, longer-term economic prospects remain lacklustre. Productivity remains subdued in our forecast – by the end of 2024, we expect output per worker to remain 2% below its (already weak) pre-COVID trend, and 19% below a continuation of its pre-financial crisis trend.

Alpesh Paleja, CBI Lead Economist, said: “Another recession in the space of two years is tough going. A second year of high – albeit falling – inflation will hit households hard, especially those lower down the income distribution. With cost pressures remaining high, many businesses will also be operating in a tough trading environment.”

“While it’s some consolation that the upcoming recession will be shallow, it’s concerning that longer-term weakness in productivity and business investment appears to be bedding in. It does not bode well for living standards and the economy’s capacity to grow over the longer-term.”

“The time for action is now. The Government should leverage more business investment to drive growth. Our analysis shows a permanent full allowances regime would unlock an extra £50bn in capital investment per year by the end of the decade.”