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Bounce in Business Confidence Points to Faster Economic Expansion

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ICAEW Forecast: Deficit Reduction Could be a Three Parliament Problem

Friday 11 September 2015 – ICAEW has today (Friday) upgraded its forecast for 2015 from 2.3% to 2.6%, as a post-election bounce in business confidence points to faster economic expansion. In addition, rising earnings growth and low inflation are continuing to boost household spending.

Despite a turbulent few months for the global economy, the UK has continued to fare relatively well, and ICAEW expects the UK to remain one of the fastest-growing developed economies in this year and next. However there are significant risks over the coming months and years. The world economy has lost momentum, and alongside weakness in China, international trade data has been worse than expected.

UK plc also faces a fiscal time-bomb in the medium term, with an increase in the living wage, apprenticeship levy, and insurance premium tax hikes all impacting on business. And once interest rates start to rise, ICAEW believes the economy could lose momentum from domestic spending. Given that the Chancellor reduced the pace of fiscal austerity at the Summer Budget, if growth slows beyond 2016, we could have a fiscal deficit after the next general election.

Key findings from the ICAEW Economic Forecast:

  • ICAEW forecasts GDP growth for 2015 at 2.6%, upgraded from 2.3% the previous quarter, as the effects from the certainty of the election result and household spending drive growth
  • For 2016, ICAEW also forecasts GDP growth of 2.6%
  • Business investment is forecast to grow by 7.4% in 2015, before slowing down to 5.9% in 2016. Previously forecast at just 4.0% in 2015, the increase is due to a fall in spare capacity, which should encourage some businesses to invest while interest rates remain low
  • However we have revised up our 2015 unemployment rate forecast to 5.4%, up from 5.1% the previous quarter. Firms appear to be making better use of the existing workforce, and part-time work is declining
  • This is contributing to an increase in productivity, which is now forecast to rise by 1.2% in 2015 and 1.3% in 2016, after growth of just 0.7% in 2014.

Michael Izza, ICAEW Chief Executive, said:

“When you take a look at the economic problems in China, and the slowdown in the eurozone, you could easily think that things are quite rosy in the UK. Economic growth is up, tax receipts are rising, and the election result has fostered a confident atmosphere that is causing businesses in many sectors to look to increase capital spending over the next year.

“But while growth of 2.6% is good, we’re not exactly booming, and there’s certainly plenty of areas of the economy that are holding us back. We could do so much better, especially when it comes to exporting, and upskilling our workforce. In addition, the government seems to constantly stall on long-term investment decisions, which is constraining our hopes of a long term recovery.

“Yet there is a fiscal time-bomb looming. Next year sees an increase in the living wage, which will especially hurt the retail, hospitality and care sectors. Furthermore, the removal of Dividend Tax Credit, the increase in insurance premium tax, and the apprenticeships levy will all hurt businesses, and I’m not convinced lowering Corporation Tax will compensate. A future interest rate rise will also damage both businesses and consumers, who we’ve been relying on for growth. These will all potentially lead to lower tax receipts, and if that happens, the Chancellor simply won’t meet his deficit reduction target. It will become a three-parliament problem.”