NIESR’s prospects for the UK economy
– After growing by 3% in 2014, the UK economy will grow by 2.5% in 2015
– Unemployment will stabilize at 5.5%
– CPI inflation will be close to target this year and next. We expect interest rates to begin to rise gradually from the middle of 2015
We expect GDP growth of 3% this year, moderating to 2.5% in 2015. UK economic statistics have recently undergone significant revisions, but they do not change the broader picture: the turnaround of the UK economy remains the weakest in the past century while the UK’s large productivity puzzle persists and, notwithstanding the gradual accumulation of an evidence base, remains largely unsolved.
Domestic demand growth appears to be somewhat more balanced, with business investment providing a greater positive contribution since the end of the great recession. At the same time, this implies business investment will contribute less to economic growth over the forecast horizon than previously expected. We expect business investment to grow by 9.3% this year and by 8.2% in 2015, before easing to 2-3% in 2016 and 2017.
Recent weak inflation numbers appear to have alleviated the pressure to tighten monetary policy. The appreciation of sterling between March 2013 and July 2014 will still have a downward effect on the rate of inflation in the short term. Looking through this temporary effect suggests an underlying rate of inflation closer to 2%. On balance, we think the risk of waiting a few more months to start raising interest rates outweighs the risk from a premature tightening. We have revised our view of the initial increase in interest rates from February to June 2015.
Unemployment has now fallen 1.5% in the past year, dropping below 6% in the second half of this year. We expect the wedge between the growth rates of employment and the labour force to narrow over the forecast horizon, as the unemployment rate stabilises at around 5.5% from 2018.
We expect public sector net borrowing to be little changed between the last fiscal year and 2014-15, at around £97bn. Tax revenues for this fiscal year have proved to be weaker than expected, as a consequence of the subdued average wage growth. Realisation of the announced path for future government consumption should move the public sector into surplus by 2019-20.
The key domestic risk to the progress of the recovery is productivity growth: should this fail to recover as we expect, the impact on both living standards and public finances will be significant. Externally, the generalised weakness of the global recovery and, in particular, continued stagnation (or worse) in the Euro area, are obviously significant risks for the UK economy.
