EY ITEM Club Winter Forecast 2014
Economic forecast in summary
At a headline level, the UK’s economic rebound is continuing to exceed expectations. With GDP now projected to grow by 2.7% in 2014 followed by 2.4% in 2015, it’s easy to assume that good times are back.
But, as ever, the reality is more complex. The current recovery is lopsided in two ways. The first is that it’s being driven almost exclusively by consumer spending and housing. Until rising business confidence is matched by a revival in investment and exports, the upturn will be neither balanced nor sustainable.
The second imbalance is that, despite rising employment, real wages are continuing to fall. This gap reflects a number of structural shifts in the workforce, and should close by the start of 2015. But its effect is that consumer spending cannot continue to drive the recovery without triggering a new and unwelcome rebound in household debt.
This situation poses a dilemma for the Bank of England’s Monetary Policy Committee as it gauges when to raise interest rates. With employment rising but real wages falling, the unemployment rate alone is too blunt a measure. Instead, the MPC must hold interest rates steady until real wages and business investment are rising. Otherwise it risks aborting the recovery before it reaches escape velocity.
Peter Spencer, Senior Economic Adviser to ITEM Club