‘Government can change’ UK economic stagnation, CBI urges

The UK risks another “lost decade of growth” unless the government takes action to strengthen companies’ confidence in the economy, the country’s top business group warned today.

Rishi Sunak must create an environment that incentivises business investment to avoid prolonging the UK’s growth malaise since the financial crisis, according to the Confederation of British Industry (CBI).

The alert 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.

Creating a permanent successor to the 130 per cent investment relief scheme would lift growth out of the gutter and help the economy bat away future supply shocks, the CBI said.

Separate figures from consultancy BDO last night 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.

“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 are causing them to pause investing in 2023. Government can change this,” he added.

Sunak and chancellor Jeremy Hunt last month heaped pressure on firms’ balance sheets by launching a £6bn national insurance tax grab. They also confirmed the super deduction investment allowance will end next spring.

UK GDP on course for tough time

The CBI reckons under current fiscal policy, business investment is on track to be nine per cent lower compared to before the Covid-19 crisis.

Unless the pair come back 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.

Raising business investment tends to improve an economy’s long-term health by increasing the amount of goods and services a country can produce.

Soaring inflation is at the “heart of weaker economic activity,” the forecasts said, mainly driven by households responding to a sharp fall in real incomes by slashing spending.

The CBI said inflation is on course to average 6.7 per cent in 2023, far above the Bank of England’s two per cent target.

A treasury spokesperson told Morning Wire: “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.”