UK economy set to accelerate by 2.5% in 2014 says influential think tank

7th February 2014

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The UK economy will grow by 2.5% in 2014 and by 2.1% in 2015 according to the latest forecasts from the National Institute of Social and Economic Research (NIESR) writes Philip Scott.

In a statement the think tank says that the UK’s economic recovery has now “become entrenched” as above trend growth returned in 2013, while the “remarkable performance of the labour market persists”. The NIESR now expects unemployment to drop below 7% before the end of the year.

It adds: “Consumer price inflation returned to the Bank of England’s target rate in December, raising the prospect of a resumption of real consumer wage growth.”

Recent GDP growth has been driven by domestic demand growth, especially consumer spending, which contributed 1.6 percentage points to growth in 2013, despite further falls in real consumer wages.

The NIESR says that it expects consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market. While house prices have seen a dramatic rise throughout the year, concentrated in London and the South East it warned that there is considerable uncertainty over the magnitude of the impact of Help to Buy – the scheme set up by the Government to help struggling first-time-buyers get onto the property ladder – as stronger house price inflation would lead to even stronger consumer spending growth in 2014.

It says: “Domestic demand growth will not be solely dependent on the consumer; a supportive funding environment, coupled with further reductions in uncertainty about future demand growth, is also expected to support robust growth in business investment. Net trade will remain weak however, with weakness in the Euro Area, the UK’s single most important export market, continuing to weigh on demand for UK exports.”

However the NIESR said that the surprisingly rapid fall in unemployment raises questions over the credibility of the Bank of England’s forward guidance; it remains unclear how this will be resolved.

It says: “We have brought forward the point at which we expect interest rates to rise in the second quarter of 2015, although this is still more than a year after a breach of the unemployment threshold is expected.

“The Chancellor has announced a review of the current fiscal framework, and has suggested that the government will now target a budget surplus. In fact, we expect the overall budget, including investment spending, to have just moved into surplus in 2018-19. However, this reflects both a very sharp squeeze on government consumption, and continued low levels of public sector investment.”

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