UK economy predicted to top 2008 pre-recession peak

Posted on 10 Mar 2014 by Callum Bentley

Manufacturing output remains unchanged

The British Chambers of Commerce has announced an upgrade in its growth forecasts, predicting UK economic peak higher than that seen before the 2008 fiscal crisis to be reached by summer.

The British Chambers of Commerce (BCC) has today upgraded its growth forecasts for the next two years – from 2.7% to 2.8% in 2014 and from 2.4% to 2.5% in 2015.

This growth will see the UK economy hit a pre-recession peak by summer, overtaking the peak it was at before the 2008 fiscal crisis.

The BCC is also predicting growth of 2.5% in 2016, the first time the organisation has forecasted this far ahead.

However, manufacturing output remains unchanged from the previous forecast, with expected growth of 2.0% in 2014, 1.4% in 2015. Predicted manufacturing output in 2016 is currently forecasted at 1.4%.

The Q1 2014 economic forecast conveys increasing business optimism, with GDP expected to exceed its pre-recession peak in Q2 2014 – a quarter earlier than predicted in December 2013.

“We just hope that as the General Election gets closer, politicians are not tempted to abandon a drive for long-term economic security in favour of short-term vote winners” – John Longworth, BCC

John Longworth, BCC director general said that the economy was “gaining momentum” and paid tribute to businesses across the UK that had fought hard to grow and create jobs. However, Mr Longworth also warned that major issues remained as the economy still faces long-term challenges despite recent progress.

“Our economic recovery is gaining momentum. Businesses across the UK are expanding and creating jobs, and our increasingly sunny predictions for growth are a testament to their drive and ambition,” Mr Longworth said. “Our new forecast shows that the service sector is performing particularly well, and is likely to be a key driver of growth. And the manufacturing sector, although small, is pulling its weight too, and will play an important role in sustaining our recovery.

“But it’s not time to break out the champagne glasses just yet. Major issues remain, such as the unacceptably high level of youth unemployment. We urge the Chancellor to use this month’s Budget wisely by incentivising businesses to hire young people so that the next generation of workers are not left behind.

Mr Longworth said that Britain was “simply not investing enough” and that despite the expected growth in business investment, it would still remain well below pre-crisis levels for some time.

“We just hope that as the General Election gets closer, politicians are not tempted to abandon a drive for long-term economic security in favour of short-term vote winners,” he said. “No government over the next decade can afford to get distracted – and our leaders must do everything in their power to ensure the economy goes from being merely good, to being truly great.”

Economic overview summary

  • The BCC is raising its GDP growth forecast to 2.8% in 2014 and to 2.5% in 2015. The upgrades for 2014 and 2015 are mainly due to upward revisions to historic GDP data by the ONS. For 2016 (included in our forecast for the first time) we are expecting growth of 2.5%.
  • GDP is likely to exceed its Q1 2008 pre-recession peak in Q2 2014 – one quarter earlier than we predicted in December 2013.
  • UK GDP quarterly growth is forecast at 0.7% in Q1 2014, easing slightly to 0.6% in Q2 2014, before averaging 0.6% per quarter until the end of 2016.
  • The main contributors to UK GDP growth in the next three years will be household consumption and output from services.
  • After reaching 2.4% in 2013, growth in household consumption will continue at 2.4% in 2014, and will edge up to 2.5% in 2015 and 2016.
  • Service sector outputis forecast to record growth of 2.9% in 2014, 2.7% in 2015, and 2.7% in 2016.
  • BCC expects the unemployment rate to fall from 7.2% in Q4 2013 to 6.0% in Q4 2016. The youth unemployment rate (16-24 year-olds) will remain close to three times the national average, falling from 19.9% in Q4 2013 to 17.8% in Q4 2016.
  • Business investment is expected to record strong growth of 6.6% in 2014, 5.7% in 2015, and 5.7% in 2016. Even so, business investment in 2016 will still be slightly lower than in 2008.
  • predicting that the first increase in official UK interest rates will be in Q3 2015 to 0.75% – one quarter earlier than previously forecast. We expect this will be followed by modest increases in 0.25% steps to reach 1.50% in the second half of 2016.

David Kern, chief economist at the BCC, added: “The upgrades to our growth forecasts are largely due to revisions to historic GDP data by the ONS. The good news is that GDP growth is expected to remain well above 2% for the next three years, and is likely to exceed its pre-recession peak in the second quarter of 2014 – a quarter earlier than we predicted in late 2013. This shows that the economy is on the right track, but we mustn’t be fooled into thinking that it is back up to full strength just yet.

“The UK’s current account deficit remains excessive, and without a stronger rebalancing towards net exports, we could face serious risks to our long term economic health. In addition, while business investment is set to pick up, it is still far behind our pre-crisis peak. If we are to better this, we need higher productivity. What’s more, businesses will only increase their capital if the current environment of low inflation and low interest rates persists.