Latest forecast for UK economy
– The UK economy will grow by 2.9% in 2015 and 2.3% in 2016
– Unemployment will drop to 5.2% by the end of this year
– CPI inflation will average about 0.5% this year, well below target; we do not expect interest rates to rise until the beginning of 2016
We have revised up our forecast for GDP growth in 2015 significantly, to almost 3%. This is almost entirely due to the sharp fall in the oil price. Not only does this boost consumer spending, now forecast to increase by almost 3.5% in 2015, it also improves the UK’s trade balance. However the weakness of the global economy – and in particular the Euro Area, by far the UK’s largest trading partner – remains a hindrance to a significant improvement.
We expect growth to moderate in 2016 and beyond, as the positive impact of the oil price shock dissipates and domestic demand growth softens. Offsetting this is a strengthening global economy that should support the recovery in the growth of exports. The outlook is consistent with economic recovery, and we expect economic growth to outpace growth in long-run capacity for a number of years.
The rate of inflation is forecast to average around 0.5% per annum in 2015, but there is considerable uncertainty; we estimate a one-in-10 probability that prices will fall this year. The pass-through from oil price and exchange rate developments to consumer prices is significantly disinflationary, but this is expected to be only temporary.
Just six months ago financial markets had expected the Monetary Policy Committee to introduce the first interest rate rise in time for this February’s Inflation Report. Financial markets have pushed back this expectation to the middle of 2016. We think this exaggerates the shift in the policy stance and we expect the first interest rate rise early next year.
The labour market remains healthy. We expect unemployment to fall to about 5.25% by the end of the year and to remain close to this level through to the end of our forecast horizon.
In the near term, real wages and consumer spending will be boosted by the disinflationary effect of the oil price shock. Beyond this it is the performance of productivity that is the key to real wage growth, and it remains the most significant domestic risk to the UK’s economic outlook. If the recent poor productivity performance is a structural rather than a cyclical phenomenon, as assumed, then this would have serious implications for future standards of living as well as economic policy.
Our projections assume that the government sticks to its current fiscal plans. This would result in an absolute surplus in 2018-19, while public sector net debt would peak at 83% of GDP in 2015-16. It is of course possible that a new government would vary these plans: the Commentary in this edition of the Review illustrates the potential macroeconomic impacts of policy changes.
