The UK economy is expected to continue to grow – but at a slower rate – through 2016 and 2017, and there are signs that global economic risks, including uncertainty ahead of the EU referendum, are starting to weigh on investment plans, according to the latest CBI economic forecast.

The leading business group’s latest quarterly forecast predicts that the UK will see 2.0% GDP growth in both 2016 and 2017, both of which are downgrades from its last forecast in February (2016 – 2.3%, 2017 – 2.1%).

Growth is again expected to be driven by household spending and investment, but the deterioration in the global economic outlook, including weaker prospects for China and other emerging markets, continue to represent major challenges.

The economy saw a softer than expected start to the year, which has contributed to a large part of the downgrade in GDP growth in 2016. There are also signs that uncertainty over the outcome of the EU referendum is having a tangible impact on the spending plans of some firms.

The CBI’s central economic forecast was carried out on the basis of our current membership of the European Union.  

Carolyn Fairbairn, CBI Director-General, said:

“We expect the UK’s growth path to continue but it is likely to be at a slower rate than previously thought.

“A dark cloud of uncertainty is looming over global growth, particularly around weakening emerging markets and the outcome of the EU referendum, which is chilling some firms’ plans to invest.

“At present, the economic signals are mixed – we are in an unusually uncertain period.”

The CBI believes that the timing of a first rise in interest rates will now be in the second quarter of 2017 (rising to 0.75%) against the backdrop of slower growth.

Household spending will remain a major driver of economic growth, though it is expected to ease (2016 – 2.5%, 2017 – 1.5%). This is due, in part, to rising inflation over the course of the next two years – picking up towards the Bank of England’s target of 2% by early 2017 – which tempers growth in real incomes. Nonetheless, household spending will account for around 80% of growth in 2016, and roughly half in 2017.

Investment spending is expected to ease in the near-term, amid some signs that referendum uncertainty is bearing down on plans for capital spending.

However, a recovery in investment is expected in the second half of 2016, such that business investment remains a key support to GDP growth over the forecast period, accounting for around a quarter of growth in 2016, and a third in 2017.

Rain Newton-Smith, CBI Economics Director, said:

“With GDP growth softening and commodity prices still low, inflationary pressures remain muted. Referendum uncertainty also appears to be dampening some activity in the near-term, and so put altogether, we do not now expect to see a rise in interest rates before 2017.

“On the global front, momentum is tepid and the picture for some emerging markets remains weak. Growth among the Asian giants is likely to continue to outperform more advanced economies, but financial fragilities in China are still raising concerns.”

Once again, net trade is not expected to provide much support to growth. While the CBI expects a smaller drag in 2016 (-0.2ppts) relative to February (-0.5ppts), this mostly reflects a larger downgrade to import growth rather than much of a recovery in exports.

On the international front, growth in advanced economies should continue at a steady, if subdued, pace over the next couple of years, with the forecast for US growth at 2.0% in 2016 (from 2.4% in 2015), rising to 2.3% next year. The recovery in the Eurozone should pick up a little further, with GDP growth at 1.6% in 2016 (from 1.5% in 2015). And while growth in China (6.5%) and India (7.4%) will outperform the advanced economies over the next two years, prospects for the rest of the emerging world remain weak and commodity exporters feel the hit from low prices.