UK recovery has got legs, says EY ITEM Club forecast

15 July 2013

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The UK recovery has finally got legs, says the latest economic forecast from the EY ITEM Club, with consumer spending and the housing market propping up GDP this year until the long awaited revival in exports and business investment kicks in next year.

According to the EY ITEM Club’s Summer Forecast, UK GDP will reach 1.1% this year, before accelerating to 2.2% in 2014 and 2.6% in 2015.

“It’s looking much more positive,” says Peter Spencer, chief economic advisor to the EY ITEM Club, “and we’re unlikely to see a repeat of 2011 when a recovery in confidence was crushed by the Euro crisis.

“Spending on the high street is holding up nicely, housing market transactions are beginning to gather pace and, perhaps most significantly, the global economy also appears to be on the mend. In fact, it’s the first time in many months where we can see balanced growth in the economy.”

Consumer revival well under way

Despite only modest increases in real incomes, consumer spending will continue to improve this year. The EY ITEM Club says spending is likely to grow by 1.6% this year, rising to 1.9% in 2014. Although, the report warns that consumers will dip into their savings to fund the spending splurge - with savings ratios dropping back to 5.6% compared to 6.3% last year.

There is also good news for the UK’s housing market. Mortgage approvals are already running at their highest level for over three and a half years, boosted by the Government’s Funding for Lending scheme (FLS), and will receive further support next year from the second leg of Help to Buy, which will release pent up demand on the lower rungs of the property ladder.

According to the report, over one million people will be moving home this year. House prices are expected to follow, increasing by 2.3% in 2013, 5.5% in 2014 and 6.3% in 2015.

Spencer comments: “Six months ago there were big question marks over the strength of the housing market recovery, but it’s now performing better than we could have hoped for and the momentum looks set to build. Household finances are in better shape after a period of rebalancing and paying down debts, while the Government’s FLS and Help to Buy schemes will continue to make it easier for people to move up the property ladder. This is good news for the UK economy, supporting construction and creating a feel good factor.”

The long wait is over - exports boom expected next year

However, the most significant boost to the UK’s economic growth prospects will come from the long awaited revival in exports and business investment next year. Net trade was a substantial drag on GDP in 2012 but, with an improving outlook in key markets such as the US and China, the EY ITEM Club expects UK exports to increase by 1.2% this year and 4.6% in 2014.

Spencer explains: “There are hopeful signs for the world economy, which will lead to a pick-up in demand from the UK’s key export markets. The US has successfully negotiated the fiscal cliff, the Chinese economy is beginning to rebalance away from investment to consumption, and there is also a move towards pro-growth policies in the Eurozone. If managed successfully these factors could be a real boom for UK exporters.”

Business investment set to accelerate

It’s a similar picture for UK business investment. Despite strong corporate balance sheets, investment has fallen by a massive 34% since 2008.

“But this should all start to change from next year,” says Spencer. “Greater economic stability and an improvement in investor confidence should encourage firms to stop hoarding and start releasing their cash surpluses for investment projects and recruitment.”

Business investment is expected to increase by 8.1% next year, 9.4% in 2015 and 7.5% in 2016, providing the UK with balanced, sustainable growth over the medium term.

Be prepared or miss out, warns EY

Mark Gregory, EY’s chief economist says that companies will need to start preparing for the upturn or risk losing market share to their competitors. “Businesses have been in survival mode and have been focussed on battening down the hatches rather than investing for the future.

“But with an improving economy we could be at a tipping point when activity might increase rapidly and without warning. The challenge for corporates will be to ensure that their business models are fit for purpose and that they have investment and M&A options in the right sectors and markets, to ensure they are ready to make strategic moves ahead of the competition.”

Risks to the forecast

Concluding, Spencer adds: “The UK recovery is becoming firmly entrenched but there are nevertheless a few big ‘if’s’ which, if they are realised, could slow down the pace of growth. The Eurozone and the emerging markets will remain on the worry list for some time yet, while the US successfully managing their QExit is no foregone conclusion. But we should feel confident that things are looking up.”