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UK consumers in the driving seat as economy continues to grow solidly
The UK economy will continue to grow solidly in 2015, thanks to the boost provided by ultra-low inflation and an upturn in the eurozone recovery, according to the EY ITEM Club‘s spring forecast
The positive effects of low oil prices and falls in other commodity values, along with a strong pound importing low inflation to the UK, are all supporting the solid UK economic momentum. This benign environment for inflation is amplifying the benefits of high employment, boosting consumer confidence and allowing shoppers‘ wallets to stretch further.
The added bonus to this favourable outlook, according to the forecast, will come from an increasingly robust recovery in the eurozone. The eurozone recovery was already gathering steam before the start of quantitative easing and is now being reinforced by the European Central Bank‘s (ECB) bond buying programme. This strengthening recovery in the UK‘s biggest export market should be enough to offset some of the negative effects of the strong pound on UK firms selling overseas.
As a result, the EY ITEM Club expects GDP growth to reach 2.8% for 2015 and 3.0% for 2016, a much more positive outlook than forecast by the Office for Budget Responsibility (OBR) alongside March‘s Budget.
Geraint Davies, partner at EY in Southampton, adds: ”With the election just behind us, the economy and regional businesses are looking forward to five years stability. Despite a softer performance from business investment in recent months, we‘re likely to see the pace of spending by firms gather again later this year as companies hone their strategies to tap into buoyant consumer confidence.
”M&A activity is already picking up as companies look internationally for growth, with Europe attracting a lot of interest from the US, China and the UK. Meanwhile, businesses will be keeping a close eye on what impact the new government‘s policies on public services spending, and Europe will have on their operations.”
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – JUNE 2015 Geraint Davies, partner at EY in Southampton
Consumers in the driving seat but little prospect of a debt bubble forming
Consumer spending power will continue to be bolstered by low commodity prices and interest rates, according to the forecast. With inflation likely to remain very low through to the end of the year, the MPC is unlikely to raise interest rates until spring 2016. The EY ITEM Club predicts that interest rates will end 2016 at 1.25% and 2017 at 2.25%.
Household disposable incomes are expected to increase by 3.7% this year and consumer spending is set to rise by a more modest 2.8%, pulling the household savings ratio up to 6.5%. The EY ITEM Club says that this stronger consumer picture will more than compensate for slower growth in business investment of 4.5% in 2015, compared with 7.8% last year.
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Davies comments: ”Consumers are definitely in the driving seat of the UK economy at the moment, with employment picking up, amplified by low prices. But, unlike the OBR reservations, we see little prospect of a credit fuelled binge, with the household debt-to-income ratio set to remain relatively stable.”
Eurozone recovery will benefit UK exports
The strength of the eurozone recovery is the surprise fillip to an already-bright outlook for the UK economy, according to the EY ITEM Club‘s spring forecast. Recovery in the eurozone is being driven by recovering consumer confidence and spending, notably in Germany, but also Spain and France.
Consequently trade should begin to add rather than subtract from UK GDP this year. Overall, the EY ITEM Club expects exports to increase by 5.9% in 2015 and 4.9% in 2016.
Davies comments: ”The pick-up in consumer demand in the UK‘s biggest export market is driving growth here and compensating for the negative effect of the strong pound on exports.
”The ECB‘s extraordinary programme of quantitative easing comes very late, but better late than never.
It is reducing
interest rates and the value of the euro, while pushing up the money supply, prompting banks to begin to lend again.”
But not all plain sailing for UK exporters and investors
Davies concludes: ”However, it‘s not all plain sailing and possible risks around an EU referendum remain. In Europe, the Greek tragedy has yet to reach a denouement, although European banks and investors seem prepared for a disorderly outcome. But worries about Ukraine and Russia have eased and we are confident that the UK economy would not falter from any of these shocks.”
Details: Geraint Davies 023-8038-2007
gdavies11@uk.ey.com www.ey.com
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