UK to outperfom rest of G7 says EY
GDP growth of 3.1% is on the cards for 2014 with the UK expected to achieve the strongest growth rate amongst the G7 economies this year.
The forecasted GDP figure from EY ITEM Club Forecast compares to 2% for Canada and 1.8% for Germany.
While the consumer did most of the running over the first half of the recovery, businesses are now expected to pick up the baton with capital investment by firms set to pick up in the coming months.
As the consumer pauses for breath the report predicts growth will moderate to 2.5% in 2015.
Peter Spencer, chief economic advisor to the EY ITEM Club, said: “Last summer any growth looked better than no growth and the outlook remained uncertain. But, confidence has now returned and economic uncertainty has dropped well down the worry list.
“Business investment is being ramped up generating over half of the growth over the last year and helping to rebalance the economy away from consumption. Underpinned by a strong labour market that provides the best of both worlds – boosting incomes via employment rather than wages, while keeping inflation low – the UK economy has hit the sweet spot.”
Having accumulated large cash piles, companies now feel confident to spend again. The EY ITEM Club expects capital spending by firms to increase by 12.5% in 2014.
Mark Gregory, EY’s chief economist, adds: “After several false starts, this time it could be different. Although the consumer remains an important part of the story, stronger corporate confidence in future demand is driving fixed investment. After several years of low expenditure there is a significant amount of catching up to do.”
“Increasing M&A values suggest that there is scope for momentum to build. With large cash piles and stock market sentiment tilting towards growth, we may see a scramble to invest driven by fear of missing out.”
The UK labour market is very strong and the forecast predicts that unemployment will continue its descent, falling from 6.8% in Q1 2014 to 5.6% by the end of 2015.
According to the forecast, the country’s economy will enjoy a perfect combination of consumption financed by strong employment, rather than wage growth and borrowing, accompanied by low inflation and low interest rates.
Spencer continues: “The UK’s labour market is unlike any other. Incomes are being boosted by more members of the household entering or remaining in employment rather than heftier pay cheques and borrowing. At the same time low wage inflation is helping to rebalance the economy by restraining consumption. This unusually good performance is holding out the promise of a sustained, low inflationary expansion.”
The EY ITEM Club Forecast predicts interest rates will remain on hold this year, as wages will only recover slowly. However, the first rise is expected to come in early 2015.
