NIESR’s prospects for the UK economy
The economic recovery has become entrenched. Growth has been 0.5% or more per quarter for six consecutive quarters, nearly twice the rate of the 2010–12 periods. The UK economy has finally recovered its pre-crisis size just over six years after the onset of the downturn. Yet this is largely symbolic; GDP is still significantly below what would have been expected from the pre-crisis productivity trend, a deviation unprecedented in recent economic history. Per capita GDP is still more than 4.5% below its pre-recession level, and this level will not be recovered until 2017.
The labour market continues to perform very strongly. Total employment is more than 4% higher than it was at the start of 2008, and the employment rate has returned to its 2005 peak. We remain optimistic about further job creation and expect unemployment to fall below 6% later this year, and real wages to begin to rise gradually.
The productivity performance, therefore, remains abysmal. With output per hour worked still around 4.5% below the pre-crisis peak (2007Q4), we expect pre-crisis productivity levels to be regained only in the latter half of 2017– although, given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain.
The main near-term concern on the domestic side is the buoyancy of the housing market and the associated growth in mortgage lending. Policymakers have adopted macropudential tools as the first response, but it is unclear what effect, if any, these interventions will have on the UK housing market. We expect house price inflation to moderate in future years as monetary policy gradually tightens, with the first bank rate rise occurring in early 2015.
On the basis of the government’s announced spending envelopes, we continue to expect the public sector accounts to return to surplus in 2018–19, for the first time since 2000–1. However, it is important to note that after 2015–16 there are no detailed plans underlying these figures.
Finally, September of this year will see the ONS incorporate major changes to the National Accounts. These will substantially raise the recorded level of UK GDP, while dramatically changing our view of household and corporate sector saving, and potentially changing our view of economic developments over the past few years.
