2015: UK economic prospects

emerging positivity

Trevor Williams, Lloyds Bank Chief Economist, member of the shadow monetary policy committee and visiting professor at Derby University, shares his views on the UK economy in 2014 – and offers insight into the outlook for 2015.

2014 has seen healthy growth across the sectors, regions and nations that make up the UK, providing evidence of a broad-based economic recovery.

Key indicators showing positive growth include:

  • Manufacturing output up 3.9% in August compared with the year before
  • Construction output in July up 2.6% on the same time last year
  • Retail sales volume up 3.9% year on year, with sales responding to the strong growth in employment.

Unemployment, a key indicator of how the economy is performing, fell to 6.2% in July compared to 7.7% the year before, with the number of people in employment increasing by 774,000 compared to this time last year.

Positive growth picture for 2014

This gives us a sense of the strength of the UK’s economic performance. The economy has now expanded for six consecutive quarters and the level of GDP now stands 2.7% higher than its pre-crisis peak in Q1 2008.

This recovery has been fuelled and in turn is supporting higher consumer confidence, which is reflected in the growth of house prices. In August, house price inflation, according to the Office for National Statistics, was 11.7% higher than in the same period of the year before. Meanwhile, consumer price inflation remains low and well within the Government target, recording just 1.5% in the 12-months to August, the lowest rate since September 2009. The low rate of inflation has helped keep interest rates at a record low of 0.5% since March 2009. This in turn has supported the economic recovery.

However, it isn’t all plain sailing. More remains to be done to raise productivity, which has shown persistent weakness in the face of higher levels of employment. The external deficit remains too wide, a consequence of a strong domestic economic recovery compared to weak growth in our key export markets of Europe. Having said that, the overall picture is one of a solid, sustainable economic recovery in the UK. We would expect industrial production to remain strong on the back of increasing business confidence.

Strong outlook for 2015

Looking ahead to 2015, the prospects for continued growth look very good. The consensus forecast for 2015 is of growth of around 2.6%; our own forecast suggests this could be marginally higher, but whatever the outcome that is a solid pace of expansion.

Although the services sector remains largely responsible for growth of 0.9% quarter on quarter in Q2, manufacturing and construction are also contributing. This will continue in 2015. On the expenditure side, business investment grew by 9.2% in the year to June 2014, and another strong performance is expected in 2015 as business confidence remains strong.

Challenges in the external environment

The greatest risks to UK economic growth appear to come from overseas, with continued slow growth in Europe, exacerbated by the situation in the Ukraine and the risks from the knock-on effects of sanctions against Russia. We should also remain mindful of unfolding events in the Middle East, especially in Syria and Iraq, which have the potential to destabilise global trade and confidence.

Closer to home, despite strong growth in employment we’ve seen continued poor growth in productivity - though there are signs that this is starting to change. Similarly, wage inflation remains low by historical standards at this phase of economic recovery, and could hit consumer spending power in 2015 if employment growth slowed.

Another issue we should watch closely is the UK’s current account deficit, which remains wide, meaning that we are importing more than we are exporting as our key developed country markets suffer, apart from the US.

Despite these challenges, the UK economy looks set to remain one of the fastest growing of the G7 economies in 2015, just as it was in 2014.

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