EY ITEM Club UK Autumn Forecast 2013
Economic forecast in detail
UK GDP is set to grow by 1.4% this year, accelerating to 2.4% in 2014 and 2.6% in 2015. Whilst any growth is better than no growth, and these rates of expansion are much faster than any seen since the crisis, the problem is that the acceleration is currently being fuelled by the resurgent consumer and housing markets. With earnings and employment struggling to keep pace with price inflation, the consumer alone cannot drive the economy forward for very long without further help. So the upturn risks running out of steam unless there is an increased contribution from exports and business investment — something we do expect to happen in the coming years.
Consumer confidence and spending
Consumer confidence has rebounded strongly, helped by falling unemployment, an easing of inflationary pressures and the recovery in the housing market. With economic activity and confidence continuing to see a gradual improvement, consumer spending growth will accelerate from 1.2% in 2012 to 1.6% this year, before rising further to 1.9% in 2014 and 2.2% 2015. A further positive sign for the high street is that the savings ratio is easing back as household debt continues to fall in relation to income. And average earnings will once again begin to outpace inflation from 2014, boosting real household incomes.
The housing market
The government’s well-timed initiatives to revive mortgage lending have borne fruit, with prices and transactions recovering from the recent very low levels, in turn supporting the wider economy. The housing revival has given rise to concerns that the government’s interventions — including bringing forward the Mortgage Guarantee Scheme — risk stoking up a housing bubble, especially in London. In our view these worries are overdone, and the initiatives will have only a limited impact in London, whilst helping families and first-time buyers elsewhere. Furthermore, the projected rises in house prices are way below those seen in previous booms.
Business confidence and investment
Rising confidence amongst consumers is being mirrored in surveys of business confidence, which are almost unanimous in showing a solid recovery from the traumas of last year. But reviving business confidence is not yet feeding through into renewed capital investment, which is still behind held back by a focus on preserving cash following the recession and Euro crisis. However, with companies’ investment intentions now also on the up, we expect business investment to rebound from this year’s 5.6% decline to rise by 6.9% in 2014
Alongside business investment, the other critical support for the consumer in sustaining growth will be export orders. Here too the signs are positive, with world trade set to accelerate and export order books showing a healthy upturn as global demand for UK goods and services continues to grow. As a result, annual growth in exports will increase steadily from 2.5% this year to 6% in 2016, supporting a broadening and more balanced UK recovery. That said, with world trade growth underpinned by a rebound in the US and slow recovery in the Eurozone, risks remain if these trends were to be derailed by new shocks.
Employment and interest rates
As growth picks up, a key question is how quickly UK employment will rise in response. With the Bank of England having set an unemployment rate of 7% as the threshold for revisiting interest rates, the underlying conundrum is whether companies still need more people to support growth, or already have the employees they need. In our view, most businesses are in the latter position, and unemployment will fall below 7% only by mid-2015. This means companies will benefit from low interest rates for longer than many people assume.