Low oil prices and inflation will help Britain record its fastest growth since the financial crisis, according to the CBI.
The employers’ lobby group has upgraded its outlook for 2015 on the back of falling costs for households and businesses, echoing comments by the Bank of England governor, Mark Carney, last week that the slump in crude oil prices was “unambiguously positive” for the global economy and for the UK.
As oil prices have halved since a $115-a-barrel peak last summer, the CBI now expects the UK economy to grow by 2.7% this year, up from its 2.5% forecast in November. This would mean greater GDP growth than in 2014, when the economy expanded 2.6%, its fastest pace since 2007.
The brighter outlook for growth provides a fillip to the Tories as they head towards May’s general election on a promise to shore up the economic recovery and boost living standards after years of falling real wages.
But there were stark warnings that political volatility at home and abroad was hurting business confidence, with the election expected to be one of the most closely fought in recent times and with Greece in tense talks on its debt repayment plan.
“Falling unemployment coupled with improving wage growth and rock bottom inflation should mean that people see more money in their pockets. But businesses are looking on anxiously as insecurity continues to troll the eurozone and instability remains elsewhere,” said Katja Hall, the CBI deputy director general.
The business group expects consumer price inflation (CPI) to stay below 1% throughout most of 2015 and household spending to continue to provide much of the momentum in the UK economy.
But in the latest blow to the government’s hopes of rebalancing the economy away from overreliance on consumers, the CBI’s forecasts “underwhelming” growth in manufacturing and little help from exports.
The Treasury, however, described the lCBI forecasts as “further proof that our long-term economic plan is working”.
A spokeswoman added: “This is welcome news for households and families, but the job is not yet done so we must keep working through the plan that is delivering economic security in an uncertain world economy.”
The CBI’s forecast is the same as that from the International Monetary Fund in January.
The CBI’s optimism about real wages growing again comes before official figures this week that are expected to show inflation eased further last month. After hitting a 14-year low of 0.5% in December, inflation was probably even softer, at 0.3%, according to the consensus in a Reuters poll of economists. Separate official figures later in the week are expected to show annual wage growth holding at 1.7% in the three months to December.
The recent pickup in pay for some workers follows years of average wages falling in real terms, and Labour politicians say the “cost of living crisis” is far from over with working people £1,600 a year worse off since 2010.
Analysis on Monday claims wage stagnation will cost the Treasury at least £33bn in revenue.
The TUC said if growth in earnings had been in line with a forecast made in June 2010 by the Office for Budget Responsibility, the government’s fiscal watchdog, income tax and national insurance receipts would total £308.4bn in 2015. But the Treasury is now expected to collect £275bn, according to the analysis carried out for the TUC by thinktank the Institute for Public Policy Research.
The TUC general secretary, Frances O’Grady, said: “The chancellor has failed to reduce the deficit because of his failure to get wages growing. He spent the last five years shrinking pay packets and as a result he plans to spend the next five shrinking the state to a level not seen since the 1930s.”
Prime minister David Cameron was criticised last week for borrowing the TUC’s campaign slogan “Britain needs a pay rise” as he urged business leaders to use lower energy costs to increase wages. Critics said the prime minister’s focus on short-term price moves failed to address the underlying problem of Britain’s poor record on productivity.
There is fresh criticism on Monday from the Chartered Institute of Personnel and Development (CIPD), whose latest labour market survey reveals an increasing divide between companies that can now afford to increase wages by 2% or more and those that are stuck in a pay freeze.
Gerwyn Davies, labour market analyst for the CIPD, highlighted a link between those employers able to raise pay and how much importance they placed on good management and investing in employees.
“Productivity lies at the heart of an organisation’s ability to increase real wages above the rate of inflation,” he said.
“Therefore, the role for government is not to cajole business into giving more generous pay awards on the back of stronger economic growth and lower costs, but to understand the levers that can help more firms increase their workplace productivity and move up the quality chain.”
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