EY ITEM Club Autumn forecast

Economic forecast in summary

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In the first half of 2014 the UK economy hit the ‘sweet spot’, with the beneficial effects of rising investment and confidence feeding through. But while growth is set to continue, the outlook is now clouded by a growing groundswell of risks.

On the positive side, our headline projections for UK GDP still look reasonably healthy. We’re forecasting growth of 3.1% this year and 2.4% next, with interest rates on hold until the spring of 2015.

But, as we noted in our recent special report, consumer spending remains subdued by falling real wages – a situation that has helped to keep inflation at bay. With falling global commodity prices helping to keep input prices down, we expect CPI inflation to slow to an average of just 1.3% in 2015, and to stay below 2% until 2017.

Subdued consumer spending has also seen business investment take over as the engine of recovery. Capital spending accounted for almost half the rise in GDP in the past year. However, as political and economic risks and uncertainties multiply – ranging from the UK general election to the Eurozone’s slowdown to the situation in the Ukraine – this engine is now under threat.

Recently, the UK economy has surprised on the upside. It might again. But currently, the balance of risks is downwards.

Peter Spencer, Chief Economic Adviser to EY ITEM Club