EY ITEM Club Summer forecast

Economic forecast in summary

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What a difference a year makes. Twelve months ago, the UK economy was picking up steam from a revival in consumer spending – but the outlook remained very uncertain, with the consensus being GDP growth of just 1.0% for 2013 and 1.6% this year. At the time, we said any growth was good growth.

Today, the UK’s growth certainly is good and getting better, with output set to increase by 3.1% this year and 2.5% next, and the economy starting to rebalance from consumption towards investment and ultimately exports.

Two drivers are central to this low-inflation recovery. First, the labour market is providing the best of both worlds, boosting incomes through rising employment rather than wages, while keeping inflation low through an expanding workforce. Second, business investment has rebounded even faster than expected, generating over half of the UK’s growth over the past year and supporting the much-needed rebalancing.

Inevitably, uncertainties remain. The Eurozone crisis rumbles on, holding back exports of goods – although services exports are set to boom – and the interest rate outlook remains cloudy. But even uncertainty can be beneficial: the debate over the timing of the rise in interest rates will help keep the housing market in check – in turn probably holding back the rates hike itself to Spring 2015.

Peter Spencer, Chief Economic Adviser to EY ITEM Club