CBI says UK has ‘right kind of growth’

Prime Minister David Cameron addresses the CBI Annual conference in London. PRESS ASSOCIATION Photo.

Prime Minister David Cameron addresses the CBI Annual conference in London. PRESS ASSOCIATION Photo. Picture date: Monday November 4, 2013. Cameron today called for political consensus behind the HS2 rail link, warning that those who oppose the project are "putting our country's future at risk". See PA story INDUSTRY CBI. Photo credit should read: Stefan Rousseau/PA Wire - Credit: PA

Business group the CBI has said the UK is starting to see 'the right kind of growth' as it lifted it predictions for expansion in the economy this year from 2.4% to 2.6%.

It said business investment would make a positive contribution this year, rising at the fastest rates since 2007, while increasing exports would help net trade play a small role in supporting the recovery.

The upgraded forecast for 2014 reflects a stronger than expected performance at the end of last year. However, the CBI has downgraded growth expectations for next year from 2.6% to 2.5%.

It said business investment would swing to 6.6% improvement this year from a 3.7% decline in 2013, supported by improved confidence among firms and low borrowing costs. An increase of 8.3% is pencilled in for next year.

Stronger domestic demand would see imports rise but exports would also strengthen as growth picks up in the eurozone and the broader global economy, according to the forecast.

It predicts exports growth to rise from 1% last year to 3.6% in 2014 and 4.7% next year.

John Cridland, CBI director-general, said: 'We are starting to see signs of the right kind of growth.

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'In our view this is not a debt-fuelled, housing bubble-led recovery - our forecast shows encouraging signs that business investment and net trade are starting to play their part.'

He said more companies were inclined to invest in new technology and advertising and there was also likely to be an increase in companies coming to the market to raise finance, as well as an uptick in mergers and acquisitions.

But he said business leaders were concerned about political uncertainty as a general election campaign approaches.

'This could be a real mood killer when business leaders are faced with making big investment decisions in the months ahead,' he said.

The CBI expects that unemployment reached the Bank of England's 7% 'forward guidance' threshold in the final quarter of last year - for which labour market figures have not yet been published.

The guidance pledges that policy makers will not begin to consider a rise in interest rates until the threshold has been reached.

But the CBI predicts that despite having fallen to this level, continued low inflation and spare capacity in the economy mean that interest rates will not go up until the third quarter of 2015.

Meanwhile, earnings growth is expected to outstrip inflation this year, providing a more solid foundation for consumer spending, the report said.