Item Club: UK economy to grow by 2.8% in 2015

Posted on 20 Apr 2015 by Callum Bentley

The UK economy will continue to grow solidly in 2015, despite political uncertainty, thanks to the boost provided by ultra-low inflation and an upturn in the Eurozone recovery, according to the EY ITEM Club’s spring forecast.

The eurozone recovery was already gathering steam before the start of quantitative easing.

The positive effects of low oil prices and falls in other commodity values, along with a strong pound importing low inflation, are all supporting the solid UK economic momentum.

This benign environment for inflation is amplifying the benefits of high employment, boosting consumer confidence and allowing shoppers’ wallets to stretch further.

The added bonus to this favourable outlook, according to the forecast, will come from an increasingly robust recovery in the eurozone. The eurozone recovery was already gathering steam before the start of quantitative easing and is now being reinforced by the European Central Bank’s (ECB) bond buying programme.

This strengthening recovery in the UK’s biggest export market should be enough to offset some of the negative effects of the strong pound on UK firms selling overseas.

As a result, the EY ITEM Club expects GDP growth to reach 2.8% for 2015 and 3.0% for 2016, a much more positive outlook than forecast by the Office for Budget Responsibility (OBR) alongside March’s Budget.

UK economy taking election uncertainty in its stride

Peter Spencer, chief economic advisor, EY ITEM Club.

Peter Spencer, chief economic advisor to the EY ITEM Club commented: “The economy is taking the General Election in its stride as ‘noflation’ trumps politics. The eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016.

“This is a mirror image of what we saw in 2010-12, when unemployment and inflation were high and Europe was in the doldrums. If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post 7 May should be strong enough to outweigh the effects of any political uncertainty.”

Mark Gregory, EY’s chief economist added: “With less than a month now until the election, the economy and businesses seem to be powering through relatively unscathed. Despite a softer performance from business investment in recent months, we’re likely to see the pace of spending by firms gather again later this year as companies hone their strategies to tap into buoyant consumer confidence.

“M&A activity is already picking up as companies look internationally for growth, with Europe attracting a lot of interest from the US, China and the UK. Meanwhile, businesses will be keeping a close eye on what impact the next government’s policies on public services spending, and Europe will have on their operations.”

Eurozone recovery will benefit UK exports

The strength of the Eurozone recovery is the surprise fillip to an already bright outlook for the UK economy, according to the EY ITEM Club’s spring forecast. Recovery in the Eurozone is being driven by recovering consumer confidence and spending, notably in Germany, but also Spain and France.

Consequently trade should begin to add rather than subtract from UK GDP this year. Overall, the EY ITEM Club expects exports to increase by 5.9% in 2015 and 4.9% on 2016.

Spencer said: “The pick-up in consumer demand in the UK’s biggest export market is driving growth here and compensating for the negative effect of the strong Pound on exports.

“The ECB’s extraordinary programme of quantitative easing comes very late, but better late than never. It is reducing interest rates and the value of the Euro, while pushing up the money supply, prompting banks to begin to lend again.”

But not all plain sailing for UK exporters and investors

Spencer concluded: “However, it’s not all plain sailing and possible risks around a weak government and an EU referendum remain. In Europe, the Greek tragedy has yet to reach a denouement, although European banks and investors seem prepared for a disorderly outcome. But worries about Ukraine and Russia have eased and we are confident that the UK economy would not falter from any of these shocks.”