UK economy ‘to show 2.6% growth’

Posted on 27 Jan 2015 by The Manufacturer

GDP is forecast by a number of experts to have grown by 2.6% for the year, the same level as in 2007 and up from 1.7% in 2013, though quarterly expansion is believed to have slowed down for the last three months.

Fourth quarter growth for 2014 is pencilled in at 0.6%, down from 0.7% in the third quarter and 0.8% in the second quarter.

The figures are likely to be welcomed by the Coalition as ministers seek to burnish their economic credentials in the run-up to the general election.

However, an annual growth figure of 2.6% would fall short of the independent Office for Budget Responsibility (OBR) prediction trumpeted at the Chancellor’s autumn statement last month of 3%.

City forecasts for 2014 have since been revised downwards after latest official data published just before Christmas showed the economy’s performance for the first three quarters of the year had not been as healthy as previously thought.

It was also increasingly reliant on household spending as business investment faded.

The International Monetary Fund has downgraded its forecast for UK growth for 2014 from 3.2% to 2.6% as, like other major economies with the exception of the US, it missed expectations. However it still expects 2.7% growth for 2015.

Data from the Office for National Statistics (ONS) for November showed manufacturing growing at its strongest pace in seven months, and Britain’s trade deficit falling to a seven-month low, helped by cheaper oil.

But the wider production sector that includes manufacturing slowed by 0.1%, dragged lowed by oil and gas extraction due to North Sea maintenance work.

Meanwhile the construction industry shrank by 2% in November, its second monthly fall in a row.

With the combined efforts of the three main sectors the weakest since May 2013, unofficial survey data published this month suggested growth in Britain’s dominant services sector, representing three quarters of output, lost momentum in December,

Although officials remain anxious of the impact on the UK from turbulence in the eurozone. However, falling oil prices are expected to deliver a boost to consumer spending to lift expansion in the months to come.

Consumer spending has already started to help the economy, with figures last week showing retail volume sales, boosted by Black Friday promotions in November, grew by 5% in the fourth quarter on the year before, the fastest pace in a decade.

Some argue a strong performance from this sector in 2015 could see Bank of England policy makers “look through” temporary factors causing ultra-low inflation, currently at 0.5%, when deciding whether to raise interest rates this year.

Samuel Tombs, of consultancy Capital Economics, said: “The first estimate of Q4 GDP seems likely to confirm that the UK’s recovery lost a modicum of pace towards the ends of 2014, with quarterly growth slowing to – a still respectable – 0.6% or so.

“The official data we have for the fourth quarter so far have been fairly disappointing.

“However, quarterly growth of 0.6% is not to be sniffed at – and it would mean that GDP rose by 2.6% in 2014 as a whole.

“Moreover, with real wages likely to rise sustainably this year, credit conditions set to improve, and firms’ investment intentions still strong, the recovery seems unlikely to lose momentum in 2015. Indeed, we expect annual growth of around 3%.”

James Knightley, of ING Bank, said: “With real incomes set to improve due to rising wage growth and falling inflation, tax cuts coming through and employment continuing to make strong gains, 2015 in general should see consumer spending perform well.

“So, while inflation is currently very low and could in the very near term push below zero, we suspect that medium-term inflation pressures will build through 2015, suggesting that rate hikes are not out of the question later this year.”