Although far from rebalancing, the UK economy is on the road to recovery. It grew by 2.6% in 2014 and is forecast to grow at 2.7% in 2015, according to our Association. Encouraging growth in consumer spending and business investment, along with strengthening labour markets have aided this recovery. However, the depressed economic climate in the Eurozone is likely to hinder export growth.
UK GDP growth has primarily been driven by services over the past five years, which will continue to underpin growth going forward. It will also be assisted by the recovery in the construction and manufacturing sector, with the former driven primarily by developments in housing activity and infrastructure.
In addition, household consumption has contributed significantly to GDP growth and is forecast to grow at 2.5% in 2014 and 2015, with some moderation afterwards. Improvement in employment rates, household sentiment and credit expansion are the key reasons for the improvement in household spending behaviour. Unemployment fell to 5.8% between September to November 2014 from 6.0% in June to August 2014.
Business investment has picked up significantly, with growth in 2014 Q3 that was 6.3% higher than a year earlier. Although we expect strong business investment growth in 2015, the General Election in May and the challenging global outlook is likely to hamper growth, which could impact businesses confidence and their willingness to invest.
CPI inflation slowed to 0.5% in December 2014 from 1.0% in November, mainly due to oil prices falling by 55% since mid-June. As a result, energy bills, transport and manufacturing costs have declined allowing consumers to benefit from cheaper goods and services, putting more money into their pockets. Inflation is likely to remain below the 2% target set by the Bank of England in 2015 at least. With this slowdown in inflation, and diminishing slack in the economy, monetary policy tightening is expected to be delayed until the second half of 2015. Real wages have finally received a boost after six years of decline due to falling prices of goods and services and tightening labour market.
Despite the prospect of stronger economic recovery, continuous stagnation in the Eurozone is likely to drag UK export growth down. According to the latest figures by the International Monetary Fund (IMF), growth of 1.2% is projected for the Eurozone in 2015 from 0.8% in 2014. Moreover, the global outlook has deteriorated with global economic growth for 2015 and 2016 revised down to 3.5% and 3.7% respectively.
By Amandeep Bahra at 12 Feb 2015, 11:33 AM