CBI: Economy to contract by 0.4% next year

Based on findings from its economic forecast for 2023, high inflation is expected to be at the heart of this weaker activity – although it does say CPI inflation already peaked in October, hitting a 40-year high of 11.1%, and will fall gradually over the coming year. Despite this, it will remain significantly above the Bank of England’s two percent target over 2023 – ending the year at 3.9%.  

This, according to the CBI, will mean the squeeze on households will persist next year – leading to a year-long decline in consumer spending. This will weigh on other areas of the economy, particularly hitting business investment – which is expected to fall from mid-2023.  

Going into 2024, the outlook will improve when the economy grows by 1.6% – driven by inflation falling back further and the squeeze on household incomes being alleviated.  

However, longer-term economic prospects remain lacklustre with productivity expected to be subdued with output per worker remaining two percent below its pre-Covid trend by the end of 2024, and 19% below a continuation of its pre-financial crisis trend, while business investment will be nine percent below its pre-Covid level.  

This combination of prolonged weakness in productivity and investment – alongside another recession – will, according to the CBI, leave their mark on the UK economy with GDP remaining eight percent below its pre-Covid trend and 27% below its pre-financial crisis trend by the end of its forecast. 

The business organisation’s director-general Tony Dacker said: “Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment.  

“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’s lead economist Alpesh Paleja added: “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.”