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Government must act on business investment to avoid recession
With less than 40 days until parliament goes into recess, the countdown is on for the Prime Minister and Chancellor to take the vital actions needed to spare the country from dipping into recession, according to the latest CBI economic forecast.
With the cost-of-living crunch showing no sign of abating, airports struggling to cope, national rail strikes on the horizon and Groundhog Day battles with the EU over the Northern Ireland Protocol, there is real risk that the economy stays a ‘distant second to politics’ this summer.
The CBI’s outlook suggests growth will soften as household spending turns downwards amid dented business and consumer confidence. As a result, the CBI has downgraded its GDP growth outlook significantly, to 3.7% in 2022 (from 5.1% previously) and 1.0% in 2023 (from 3.0% previously).
High inflation is the primary source of weaker growth. CPI inflation reached a 40-year high in April (9%), driven higher by a cocktail of challenges – ranging from supply chain pressures, rising commodity prices and war in Ukraine.
Inflation is expected to remain high into Autumn, rising to another peak in October (8.7%), given a likely rise in Ofgem’s energy price cap. The result is a historic squeeze in household incomes, which will lower consumer spending. This in turn will weaken GDP growth towards the end of this year and into the first half of next year.
Tony Danker, CBI director-general, said: “Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.
“Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.
“It’s as clear as day that business investment is one of the few bright spots left in our economy. The Super Deduction is one of the only reasons we have staved off the threat of recession for now – there must be a permanent successor.
“We’ve had weeks of politicking with the country standing on the brink of a summer of gridlock.
“There is only a small window until recess. Inaction this summer would set in stone a stagnant economy in 2023, with recession a very live concern.
“We need to act now to install confidence. This can wait no longer.”
What needs to be done this summer
Build momentum behind business investment ahead of the Autumn Budget:
- Make a full commitment to a permanent successor the super-deduction
- Cut approval times for new offshore wind farms from 4 years to 1 year
Boost confidence in the economy:
- Call for immediate talks to finally resolve the Northern Ireland Protocol impasse and get Brexit done – resist unilateral action with both sides getting on with the job of finding a negotiated outcome
- Act as an honest broker between rail companies and unions to find solutions to avoid a summer of train chaos
- Announce a permanent replacement to the Recovery Loan Scheme to support cashflow
Take immediate steps to alleviate labour and skills shortages:
- Get real on industry concerns over labour shortages – get going on a new shortage occupations list and add sectors with obvious shortages, like aviation, until that review can be completed.
- Add immediate flexibility to the apprenticeship levy for one year allowing all employers in the country to use their levy funds to tackle labour shortages.
Capital spending is set to fall away in the second half of 2023 as the super-deduction ends, which is why the CBI has been calling for a permanent investment incentive to buttress growth into next year.
Meanwhile, the CBI expects a small rise in the unemployment rate – ending 2023 at 4.1% – as weaker economic growth weighs on hiring. Nonetheless, this still marks a relatively tight labour market, with many firms presently carrying vacancies.
Exports continue to underperform compared with our international peers, remaining 10% below their pre-COVID level at the end of 2023.
Rain Newton-Smith, CBI chief economist, said: “This is a tough set of statistics to stomach. War in Ukraine, a global pandemic, continued strains on supply chains – all preceded by Brexit – has proven to be a toxic recipe for UK growth.
“The bottom line is that the outlook for UK exports remains far worse than our worldwide competitors. This has got to change for the better.
“Business and government must work together to seek growth globally. As demand shrinks, competition for revenue increases. UK business must be more confident in identifying new markets and utilising all the tools at their disposal – be it from the private sector or public sector.
“Government also has an integral role to play. Against the backdrop of the rising cost of doing business and continuing supply chain pressures, easing trade flows is in everyone’s interests. It’s not just about lowering non-tariff trade barriers in Europe and signing FTAs.
“Post-Brexit regulatory reforms to support growth, innovation and sustainability can build competitiveness. But divergence for the sake of it could introduce further red tape and friction undermining that mission.
“Moreover, we can and must do more domestically to help our exporters too. Now that R&D allocations are known, let’s get that funding out the door quickly to the Advanced Research and Invention Agency and others.”
Government plan aims to support UK food production
“Harnessing new technologies and innovation, we will grow and eat more of our own food – unlocking jobs across the country and growing the economy, which in turn will ultimately help to reduce pressure on prices.”
Environment Secretary George Eustice said: “The food industry is bigger than the automotive and aerospace industries combined, offering employment opportunities, apprenticeships and investment in research and development.“The strategy we are setting out will increase the focus on skills in the food sector, and the roles and career pathways available. In particular, we will seek to boost our horticulture industry and ensure the expertise needed to develop the sector here in the UK.”
The Strategy follows the independent review of the food system by Henry Dimbleby last year, which set out an analysis of the challenges facing the food system. The Government Food Strategy responds to these findings and recommendations, accepting the majority of recommendations, with policy initiatives to boost health, sustainability, accessibility of diet to secure food supply, while also recognising the shared global challenges of the war in Ukraine and the impact of the pandemic on the global economy The strategy also includes plans to:- Consult on an ambition for 50% of public sector expenditure on food procurement to be on food either produced locally or to higher standards
- Incentivise the sector to use surplus heat and CO2 from industrial processes, and renewable sources of energy to increase domestic horticultural production
- Review the planning permission process to support new developments of glasshouses
- Launch an independent review to tackle labour shortages in the food supply chain, to look at the roles of automation, domestic labour and migration to ensure UK businesses can access the labour they require
- Consult on how to improve on and expand animal welfare labelling, to help consumers identify when products meet or exceed our high UK animal welfare standards
- Extend the Seasonal Workers visa route to poultry, following a successful pilot last year
- Publish a framework for land use in England next year
- Consult on food waste reporting for larger businesses over a certain size
- Publish a statement setting out requirements for those wishing to access the UK market to objectively demonstrate they deliver an equivalent level of health protection to our high domestic standards
- Explore how to make the most of innovative feed additives that can reduce methane emissions from livestock, to support sustainable farming
- Launch a new partnership between the public and private sector to provide consumers with more information about the food they eat while incentivising industry to produce healthier, more ethical and sustainable goods