CBI marks up UK GDP forecasts but says risks remain high

One of the country's leading business lobby groups marked up its short-term forecasts for the economy even as it warned risks to the economy remain high because of uncertainty related to Brexit and given the potential for higher-than-expected volatility in financial markets.

The Confederation of British Industry revised its estimates for UK gross domestic product in 2017 and 2018 higher, from 1.3% and 1.1% to 1.6% and 1.4%, respectively.

In particular, CBI now expected foreign trade would provide additional support as the pound weakened, amid a solid global economic backdrop.

Business investment was also seen holding up better in the near-term, with its surveys finding that intentions to investment had in fact improved since the referendum.

Echoing the Bank of England's own forecasts, investment was now seen expanding by 1.3% and 1.5% in 2017 and 2018, compared to a November forecast for no growth in the current year and a drop of 1.2% next.

However, the group was quick to point out that its upgraded projections masked the slowdown that was expected to ensue in 2018, in particular.

"With uncertainty still holding back larger spending projects, we expect investment to wane over the course of 2018," CBI said.

Household spending was seen as the Achille's heel of the British economy, with average CPI gains of 2.7% this year and next set to pretty much outpace growth in wages.

As a result, household spending would slow from a rate of gain of 2.8% in 2016, to 1.7% in 2017 and 0.7% in 2018.

On a cheerier note, the quarterly rate of GDP growth was seen picking-up from roughly 0.3% to 0.4% over the forecast horizon after an expansion of just 0.2% over the first three months of 2017.

Nevertheless, that would still be about half the average pace of 0.6% observed since 2013.

In the background, Bank Rate was seen rising to 0.50% in the third quarter of 2018.

Further increases in Bank Rate beyond the forecast horizon seemed likely, given the lack of spare capacity in the economy and provided the EU negotiations went smoothly, the group said.

CBI chief economist Rain Newton-Smith said: "But risks to our forecast remain high. In particular, uncertainty over the UK's future role in the EU could have more of an impact on both activity and financial market volatility than we expect. In the near-term, there are more risks to the upside too: particularly with surveys pointing to firmer growth over Q1 2017 and going into Q2."