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CBI increases UK GDP forecast for 2015 & 2016

The UK is to enjoy decent quarterly GDP growth the CBI has predicted as it upgrades its forecasts for this year and next. The business lobby group now expects growth of 2.6% this year and 2.8% next year, up from its June forecast of 2.4% and 2.5% respectively.

Increased household spending and robust investment growth will drive the improved growth, the CBI believes. The CBI now expects interest rates to rise in the first quarter of next year. In June, it had expected rates to begin rising from their historic low of 0.5% from the start of April next year.

But it now says the improved growth picture alongside more hawkish comments from the Bank of England’s rate-setting Monetary Policy Committee had prompted it to bring its prediction forward.

“We now expect interest rates to rise to 0.75% in the first quarter of 2016, and then rise at a slow pace thereafter,” the CBI said. The CBI said it expected growth until the end of next year to continue at a similar pace to the three months to the end of June, averaging 0.7% a quarter.

Household spending and business investment would remain the two key factors driving growth next year, it added. It said improved productivity had also helped to boost wage growth. This combined with low inflation, largely due to the drop in commodity prices, meant households had more to spend, the CBI said.

But it warned that the outlook on exports was somewhat muted with the strong pound hitting the UK’s competitiveness abroad. And it said Eurozone growth would remain subdued for the foreseeable future.

“Strong domestic demand and upbeat official data since our last forecast has boosted our outlook for 2015. We expect this strength to continue into next year,” said CBI director for economics Rain Newton-Smith.