UK Migration Curbs Pose Threat to Brighter Outlook, CBI Warns
(Bloomberg) -- The Confederation of British Industry raised its UK growth forecasts but warned that government attempts to crack down on immigration threaten to rekindle inflation.
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The business lobby group said the economy is on track to grow 1% this year and 1.9% in 2025, a big upgrade since December and a more optimistic outlook than either the Bank of England or the International Monetary Fund, as improving living standards boost household incomes and raise consumer spending.
The forecast assumes sharp interest-rate cuts starting in August, when the CBI expects the BOE to reduce its benchmark by quarter point to 5%. The central bank will then “cut incrementally but successively thereafter with interest rates settling at 3.5% in May next year,” said Alpesh Paleja, CBI lead economist.
Money markets are less convinced, with fewer than three quarter-point cuts fully priced in by May after surprisingly strong inflation readings in the UK and the US. The European Central Bank cast further doubt over the outlook on Thursday by cutting its deposit rate, as expected, but warning that inflation will take longer to reach the 2% target.
The CBI said migration policy could raise concerns at the BOE, with both the ruling Conservatives and the Labour opposition pledging to curb foreign arrivals if they win the July 4 general election. That could further reduce the pool of available workers, fueling wage and price pressures and limiting how quickly the economy can grow.
“One of the things we are really keen to do, particularly in an election year, is reset the debate around this to make sure the economic argument is in there,” said Louise Hellem, CBI chief economist. “One of the big risks around this is pressure on employers in terms of labor shortages. That is potentially one of the upside risks in terms of inflation.”
The Conservative government tightened up visa rules last year to reduce net migration, which was 685,000 in 2023 – double the level seen before Brexit. Prime Minister Rishi Sunak this month promised to bring in a legal cap to curb numbers if his party is re-elected.
Labour, which has a commanding lead over the Tories in the polls, has also pledged to bring down migration by improving training for British workers and reducing demand for foreign staff. The issue looks set to be a key battleground at the election now that Nigel Farage, a leading figure behind Brexit and a popular critic of migration, has entered the campaign as leader of Reform UK.
The CBI was largely upbeat on immediate prospects. Improving household incomes, higher benefits, lower taxes, interest-rate cuts and lower unemployment “will act as tailwinds for spending in 2025,” it said.
The UK is moving to a “normal inflationary environment,” Paleja said, but the ride will be “bumpy” in the coming months and rate cuts could be thrown off course by upcoming releases on wages and consumer prices.
The upward revision to the CBI’s growth forecasts, from December’s projected 0.8% for 2024 and 1.6% for 2025, followed a similar move by the British Chambers of Commerce on Thursday. The business group expects the economy to expand 0.8% this year, up from 0.5%, and 1% in 2025 versus 0.7%.
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