Unless the government takes action to strengthen companies’ confidence in the economy, the UK risks another “lost decade of growth”, the country’s top business group has warned. According to the Confederation of British Industry (CBI), Rishi Sunak must create an environment that incentivises business investment to avoid prolonging the UK’s growth malaise since the financial crisis.
The warning has been sparked by the organisation’s latest set of economic forecasts revealing the UK is already in a recession that will last until the end of next year. That long slump has shaved 1.4 percentage points off the CBI’s GDP projections and the group now thinks the economy will contract 0.4 per cent in 2023.
Separate figures from consultancy BDO show businesses agree with the CBI’s assessment. Nearly half of British firms are concerned about being unable to source materials due to supply chains breaking down.
Ramping up investment incentives could help businesses expand capital stock, limiting their exposure to international trade disruption. Stimulating investment improves an economy’s long-term health by increasing the amount of goods and services it can produce.
“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment,” Tony Danker, director general of the lobby group, said. Firms see potential growth opportunities but a lack of “reasons to believe” in the face of headwinds is causing them to pause investing in 2023, he said. “Government can change this,” he added.
Sunak and Chancellor Jeremy Hunt last month put pressure on firms’ balance sheets by launching a near £6 billion national insurance tax grab. They also confirmed the super deduction investment allowance will end next spring. Under current fiscal policy, the CBI reckons business investment is on track to be nine per cent lower compared to pre-Covid-19 crisis.
Unless Sunak and Hunt return to the dispatch box with policies to trigger an investment boom to reverse years of chronically poor productivity improvements, the UK economy will by the end of the CBI’s forecast period be 27 per cent smaller compared to its pre-financial crisis trend. A Treasury spokesperson said: “We have been honest that there are tough times ahead for the UK economy in the face of strong global headwinds, and we are not alone in that challenge.”
Hunt said the economy is going to get worse before it gets better – as he defended the decision not to give public sector pay rises in line with inflation. He made the comments following the release of gloomy figures showing a 0.3pc fall in growth, also insisted 12 years of Conservative rule and Brexit were not to blame for the UK’s financial woes.
He instead highlighted global issues, such as the war in Ukraine and the pandemic. He said: “I think it’s a very challenging international picture. About a third of the world’s economies are predicted to be in recession, either this year or next. We’re no different in this country.”
Hunt added: “And truthfully, it is likely it will get worse before it gets better. Which makes it even more difficult when we have big public sector strikes going on at the moment. But we have a plan that will more than halve the inflation over the next year. So, if we stay on course we can get back to strong economic growth.”
He described strikes as a ‘symptom’ of inflation, which hit a 40-year high of 11.1 per cent in October, and said tackling that would “deal with the underlining anger many people feel”. However, while Hunt described unions as being ‘completely sincere’ in wanting better salaries for workers, he insisted that independent review bodies were best placed to make recommendations on pay. (The writer is our foreign correspondent based in the UK)
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