The UK runs the risk of being overtaken by other developed economies, according to the Confederation of British Industry (CBI).
The business group said that issues such as Brexit and the rise in protectionism across the globe remain a challenge to investment within the UK.
It said the UK outlook remained subject to a high degree of downside risk with the possibility that unfavourable outcomes from Brexit negotiations could disrupt the economy and financial markets more than expected.
In its latest economic forecast, the CBI said: “Downside risks to the global outlook remain significant: particularly from the prospect of further protectionist action on trade, and the implications of political instability in Italy for the wider eurozone.
“This makes the need to focus on the drivers of domestic success – where government and business have greater control – critical for driving growth.”
The business group, which represents 190,000 UK companies, issued the warning as it revised down GDP growth for 2018, due to the poor British weather over the first quarter.
Growth for the year is now forecast at 1.4%, slightly down from the 1.5% expected back in December 2017.
The CBI predicts 1.3% growth for 2019, as the British economy moves largely within its expectations.
It expects inflation to stand at 2.1% at the end of 2019, broadly in line with the Bank of England’s target.
The body said the main themes of the UK’s economic outlook remain unchanged, but that UK living standards will continue to be dragged by weak productivity, despite real pay growth edging upwards.
“As a result, any further pick up in real wages is likely to be modest, continuing to weigh on consumer spending throughout our forecast,” the report said.
The CBI said the UK economy can accelerate if government and businesses focus on productivity improvements at home, while taking advantage of opportunities abroad.
Image: AI and digitisation are attracting investment from UK businesses
It added that the artificial inteligence (AI) and digitisation was increasingly being used by companies to achieve efficiencies and raise productivity, attracting investment at a time when the uncertainty around Brexit continued to hamper business investment decisions.
Rain Newton-Smith, CBI chief economist, said: “Snow capped a sluggish start to 2018 for the UK economy, and there’s no disguising that Britain now finds itself in the ‘slow lane’ for growth.
“Businesses can do little to mitigate wider risks, but many firms are doing what they can to get themselves in good shape by investing in AI and digitalisation.
“Productivity weakness is a structural challenge for the UK economy and a drag on living standards. Many businesses are taking action now to change this. Adapting technologies and finding smarter ways of working are just two approaches to improving productivity growth and prosperity.
“Recent government announcements on funding to help share best practice among companies and targets for full-fibre broadband are good steps in the right direction.
“Over the longer term, firms must work with government to nurture a pro-enterprise environment to drive growth and create wealth. And there is much within the UK’s control that can be acted on now.
“Creating extra capacity at Heathrow will allow firms to tap into global opportunities more seamlessly. Building skills fit for the 21st century is essential too, so getting new technical education routes right really matters.
“As the UK leaves the EU, we know the world is watching: so business and government must work together to drive competitiveness at home so firms can make the most of opportunities overseas.”
The CBI expects the global economy to grow by 3.8% in 2018 and 3.6% in 2019 (in purchasing power parity terms), following growth of 3.7% in 2017.
Alpesh Paleja, CBI principal economist, added: “With the pound low and the global economy firing ahead, there’s never been a better time for UK firms to get export ready. Looking ahead, we expect more of a lift to the economy from net trade, marking a shift in the composition of economic growth.
“Yet at home, momentum is set to remain weak. Households remain under pressure from lacklustre wage growth, while businesses are grappling with skill shortages. In some sectors, particularly retail, trading environments remain tough.
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“While many companies are turning their attention to AI, automation and streamlining operations to stay competitive, there is only so much that they can do when Brexit uncertainty continues to loom large.
“Therefore, getting clarity on the future economic relationship between the UK and the EU – by building on progress made in March – is vital for firms of all sizes on both sides of the Channel. Hitting important milestones in negotiations will give businesses the certainty that they need to invest and plan for the future.”