UK faces recession and lost decade without growth plan, business group says

LONDON – Britain’s economy is on course to shrink 0.4 per cent in 2023

as inflation remains high

and companies put investment on hold, with gloomy implications for longer-term growth, the Confederation of Business Industry (CBI) said on Monday.

In its latest forecast, the CBI said Britain has already fallen into a “short and shallow” recession that will leave business investment 9 per cent below pre-pandemic 2019 levels.

“Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but… headwinds are causing them to pause investing in 2023,” CBI director-general Tony Danker said.

The CBI’s forecast marks a sharp downgrade from its last forecast in June, when it predicted growth of 1 per cent for 2023, and it does not expect gross domestic product (GDP) to return to its pre-Covid-19 level until mid-2024. Britain has been hit hard by a surge in natural gas prices following Russia’s invasion of Ukraine, as well as an incomplete labour market recovery after the Covid-19 pandemic and persistently weak investment and productivity.

Unemployment would rise to peak at 5 per cent in late 2023 and early 2024, up from 3.6 per cent currently, the CBI said.

British inflation hit a 41-year high of 11.1 per cent in October, sharply squeezing consumer demand, and the CBI predicts it will be slow to fall, averaging 6.7 per cent next year and 2.9 per cent in 2024.

The CBI’s gross domestic product forecast is less gloomy than that of the British government’s Office for Budget Responsibility – which in November forecast a 1.4 per cent decline for 2023.

But the CBI forecast is in line with the Organisation for Economic Cooperation and Development, which expects Britain to be Europe’s weakest performing economy bar Russia in 2023.

The CBI forecast business investment at the end of 2024 will be 9 per cent below its pre-pandemic level, and output per worker 2 per cent lower. To avoid this, the CBI called on the government to make Britain’s post-Brexit work visa system more flexible, and end what it sees as an effective ban on constructing onshore wind turbines.

“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,” Mr Danker said.

He said the government can take action to restore confidence among businesses and boost growth, chiefly through a massive tax break on investment. In April, the corporation tax super-deduction expires and the tax rate rises 6 percentage points to 25 per cent.

The CBI has called for the super-deduction to be replaced with full-expensing, under which every cent invested in plant and machinery can be deducted from taxable profits. CBI chief economist Rain Newton-Smith said it would cost £10 billion (S$16.6 billion) in the first year but have no fiscal cost in the longer term.

The tax break would unlock an extra £50 billion in capital investment a year by the end of the decade and add a quarter of a percentage point to the sustainable British growth rate, the CBI said. Business investment is already well below major economic rivals in Europe and the US. Without the tax break, it will lag even further behind.

Mr Danker said time was running out. He acknowledged that November’s fiscal statement, at which the chancellor announced £55 billion of savings to repair the public finances, was necessary to ensure economic stability, but he warned “the country does not have a plan for growth”. REUTERS, BLOOMBERG