UK government urged to prioritise business investment to avoid recession

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Prime minister Boris Johnson and chancellor Rishi Sunak. The CBI called on the UK government to take action on business investment to avoid recession. Photo: Justin Tallis/AFP via Getty
Prime minister Boris Johnson and chancellor Rishi Sunak. The CBI called on the UK government to take action on business investment to avoid recession. Photo: Justin Tallis/AFP via Getty

The UK government has been urged to act on business investment as the war in Ukraine, the pandemic and the aftermath of Brexit hit UK growth as the strain on supply chains continues.

The Confederation of British Industry (CBI) warned the clock is ticking for prime minister Boris Johnson and chancellor Rishi Sunak "to take the vital actions needed to spare the country from dipping into recession".

It called on the government to take action to build momentum behind business investment ahead of the autumn budget, alleviate labour and skills shortages, and boost confidence in the economy.

"With the cost-of-living crunch showing no sign of abating, airports struggling to cope, national rail strikes on the horizon and Groundhog Day battles with the EU over the Northern Ireland Protocol, there is real risk that the economy stays a ‘distant second to politics’ this summer," the CBI said.

CBI’s outlook suggests growth will soften as household cut on spending amid dented business and consumer confidence. As a result, it downgraded its GDP growth outlook to 3.7% in 2022, from 5.1% previously, and 1.0% for next year, down from 3.0%.

Read more: UK braced for more economic gloom amid rising inflation and falling investment

The group which represents 190,000 UK firms blamed inflation as the primary source of weaker growth.

Britain's CPI inflation reached a 40-year high 9% in April, driven higher by a cocktail of challenges including food, energy and fuel costs, supply chain pressures, and war in Ukraine.

Image: CBI
Image: CBI

It expects inflation to remain elevated in the coming months, rising to another peak in October (8.7%), given a likely rise in Ofgem’s energy price cap.

"The result is a historic squeeze in household incomes, which will lower consumer spending," it added. "This in turn will weaken GDP growth towards the end of this year and into the first half of next year."

Tony Danker, director general at the CBI, said: "It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.

"Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.

"It’s as clear as day that business investment is one of the few bright spots left in our economy. The 'super deduction' is one of the only reasons we have staved off the threat of recession for now – there must be a permanent successor."

Economists said that the challenges facing the economy have "proven to be a toxic recipe for UK growth".

"Against the backdrop of the rising cost of doing business and continuing supply chain pressures, easing trade flows is in everyone’s interests. It’s not just about lowering non-tariff trade barriers in Europe and signing FTAs," said Rain Newton-Smith, chief economist at the CBI.

"Post-Brexit regulatory reforms to support growth, innovation and sustainability can build competitiveness. But divergence for the sake of it could introduce further red tape and friction undermining that mission."

Read more: Brexit cost UK economy billions in lost trade and investment

A separate analysis warned the UK is on the brink of recession amid warnings that several economic headwinds. The Organisation for Economic Co-operation and Development (OECD) forecast UK growth to stagnate at 0% in 2023, making it the worst developed world economy next year.

Another report from the Centre for European Reform (CER) concluded that UK GDP shrank by £31bn at the end of 2021 due to effects of Brexit and the pandemic.

According to the CER, UK business investment was 13.7% lower in comparison with its peers, including the US, Germany and New Zealand. Trade in goods fell 13.6%.

Meanwhile, the British Chamber of Commerce has warned Britain faces more economic gloom as geopolitical events, rising prices and a reduction in business investment continue to weigh on growth.

Watch: What is a recession and how do we spot one?

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