18 item club
Falling oil prices a ‘shot in the spending arm’ for the UK consumers
The falling prices of oil and other commodity prices will provide a ‘shot in the spending arm’ for UK consumers who are set to benefit from a substantial boost to their spending power, according to the latest quarterly forecast from the EY ITEM Club
Lower oil prices mean that inflation will average around zero in 2015, and turn negative in the early months of the year, helping to stay the hand of the MPC on interest rates. At the same time the UK’s key trading markets in America and Europe stand to benefit from lower commodity and energy prices, helping to offset the effects of weak global demand on UK exports.
Reflecting these benefits, the EY ITEM Club’s Winter Forecast is now expecting GDP to grow by 2.9% in 2015, up by 0.5% compared to the EY ITEM Club’s forecast in October.
Neil Hutt, EY’s senior partner in Reading comments: “Although lower fuel prices won’t be good news for everyone – for many consumer facing companies, original business forecasts for 2015 might now be too conservative. Businesses now need to dust off these plans and adjust them to reflect the new reality of falling oil prices and growing consumer spending. At the same time, risks remain and should not be neglected. Possible shocks from developments in the eurozone, the UK general election and business specific risks such as changes in China – if this is a major destination for sales – must be taken into account when testing these plans.”
UK consumer gets a ‘shot in the arm’
It is increases in consumer spending that will drive growth in 2015, according to the EY ITEM Club. Low inflation combined with cheaper commodity prices, as a result of falling food, fuel and energy costs, will give consumers a real ‘shot in the arm’.
The EY ITEM Club is expecting income from wages and salaries to increase by 3.5% in 2015 and real disposable incomes by 3.7%. The forecast sees real household consumption increasing by 2.9% this year and 2.6% in 2016.
Peter Spencer, chief economic adviser to the EY ITEM Club, adds: "The UK consumer
www.businessmag.co.uk
These developments should persuade the MPC to err on the side of caution, according to the forecast, and keep interest rates on hold until Q1 2016. The EY ITEM Club predicts that interest rates will end 2016 at 1.5% and 2017 at 2.5%.
Spencer continues: “The monetary policy outlook remains uncertain. On the one hand, a pickup in earnings and further falls in unemployment would appear to fulfill the criteria for starting to raise interest rates. But, with the governor writing a series of letters to the chancellor explaining the low rate of inflation, it will be virtually impossible for the MPC to agree an increase in interest rates. As it stands, we expect the first increase in base rates next spring followed by a gradual rise of a quarter point every three months.”
Low interest rates boost housing transactions
The EY ITEM Club’s forecast expects annual house inflation to ease from 10% in 2014 to 7.1% in 2015. As expectations of house price rises soften, supply should be boosted as sellers who were previously holding back for a higher price bring homes on to the market, the report says. Moreover, a recovery in real earnings and the diminishing prospect of an increase in interest rates should reassure those thinking of taking out a mortgage and lead to a pickup in housing transactions.
Neil Hutt, senior partner at EY in Reading
As it stands, we expect the first increase in base rates next spring
has been lashed by rising fuel and food prices for so long, but is now the major beneficiary as these pull back. So far, the recovery in our incomes has been driven by larger numbers entering work while earnings have been falling. But, now individuals can look forward to a substantial increase in real earnings.”
MPC faced with an inflationary paradox
A combination of tumbling oil prices and reduced production costs will see inflation turning negative in the first half of 2015 and staying below 1% over the rest of the year. The EY ITEM Club expects inflation to average 1.5% in 2016, before reaching the 2% target in 2017.
THE BUSINESS MAGAZINE – THAMES VALLEY – MARCH 2015
Spencer comments: “The slowdown in the mortgage and housing markets last year was partly due to expectations of rising interest rates, which are now less of an immediate threat. Real incomes are a major driver for the housing market and as they increase we should see renewed momentum this year. The removal of the ‘slab’ effect on stamp duty is also likely to be supportive, particularly for transactions, while scrapping the annuity requirement for defined contribution pension schemes will free up funds for retirees to invest in the market.”
Details: Neil Hutt 0118-9281535
nhutt@uk.ey.com www.ey.com
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