The UK economy performed impressively in 2014, with the latest official estimate of 0.5% growth in Q4 taking annualised growth to 2.6%, the best performing of the G7 Nations. While the outlook for 2015 brings greater uncertainty, both economically and politically, the consensus points to continuing robust growth over the coming year.
Productivity improving as real wages rise
The UK’s record on employment has been remarkable over the past few years, with the working population at an all-time high and unemployment at 5.8%, its lowest since Q3 2008. Moreover, for the first time since 2009, wage growth has moved ahead of inflation which indicates that productivity is also improving. Rising real wages should underpin consumer demand and support ongoing growth in the UK economy.
Low inflation will help rather hinder the UK outlook
The prospect of continued real wage increases has been given an additional boost by a sharp fall in CPI inflation which, at 0.5% over the year to December 2014, is equal to the lowest rate in its 25 year history. While low and falling inflation can prompt concerns over demand, the recent trend is attributed to a halving in oil prices over the past six months, brought about by softening global demand and high output in the Middle East. While low oil prices will have implications for the North Sea oil industry, it is likely to be a boon for UK consumers. Lower costs are feeding through to lower petrol, utilities and food prices which will free up more disposable household income and boost growth. Reflecting these
changing circumstances, the EY item club recently revised up its forecast for UK economic growth in 2015 to 2.9%, a 0.5% improvement on its previous forecast.
Interest rate rise as late as 2016?
Given the very real prospect of inflation averaging less than 1% throughout 2015, consensus is increasingly leaning to a first interest rate rise as late as Spring 2016. When the
rise does take place, the Bank of England has been mindful to make clear that any increases towards ‘normalised’ rates will be gradual, and this should support the improvement
in the lending appetite to consumers and businesses alike.
Domestically, there is uncertainty around the outcome of May’s general election, and the prospect of a hung parliament is a strong possibility. The two main parties also have diverging stances over taxation, public spending and the pace of austerity, which may delay decision making. However, arguably greater risk surrounds a possible referendum over the UK’s membership of the EU in 2017, which may change the perception of international investors towards the UK.
Eurozone weakness is the main downside risk
Stagnating growth in the Eurozone arguably presents the main risk to the outlook, and the UK will be reliant on strengthening domestic demand to offset weaker prospects from our largest single trade partner. However, it is hoped that the ECB’s recent announcement of a 1.1 trillion Euro package of quantitative easing will reignite Eurozone growth in the near future.
(Source Lambert Smith Hampton)