20th April 2015
Ultra low inflation coupled with a strengthening Eurozone should help the UK economy navigate through any election uncertainties and achieve 2.8% GDP growth in 2015 according to the latest EY Item Club report.
In the organisation’s UK spring forecast it said this year’s growth should rise to 3% in 2016.
Peter Spencer, chief economic adviser to the EY Item Club said: “Uncertainty over the general election is mounting, but the economy will take this in its stride. Official statistics for the first quarter of this year have been unambiguously negative, but will be revised up into line with business surveys, which are now much more positive.”
The report claimed that as a result of the “strong labour market and benign inflation and interest environment is very supportive for the consumer”.
It expects CPI inflation to average 0.1%, this year, which as a result would mean it will be difficult to raise the base rate while inflation remains below 1%.
“CPI inflation will move back above 1% this winter as base effects fall out of the calculation, paving the way for the first rate increase in the Spring of next year,” said the report.
With real incomes up 3.7% this year, the forecast sees consumption growth of 2.8%, with strong growth over the medium term sustained by the buoyancy of income rather than borrowing.
The analysis highlighted that the Eurozone was picking up before the European Central Bank announced its quantitative easing (QE) programme, based on a recovery of consumer confidence and spending in countries like Germany rather than the usual boost from exports. The report said this recovery is now also evident in countries like Spain in the periphery.
“It is clear that we are now looking at the mirror image of the storm that hit the economy in 2010-12. China and the EMs that drove the world economy and commodity prices up then have slowed dramatically. Oil and other commodity prices have fallen back dramatically,” added Spencer.
“Good harvests and supermarket price wars have also helped to bring down the prices of food and clothing in the shops. To complete this pretty picture, the Eurozone economy has staged an impressive recovery, and the pound has reversed the steep fall against the Euro seen in 2007 and 2008.”