Accelerating earnings growth will help the UK economy expand by more than 3 per cent this year, but spending cuts by the Westminster coalition will dampen the recovery in 2015, the Centre for Economics and Business Research (CEBR) said today.
The think-tank has upgraded its outlook for GDP to rise by 3.1 per cent in 2014, up from its previous forecast of 2.8 per cent released at the start of the year, helped by the falling cost of living.
According to figures from the Office for National Statistics (ONS) last week, inflation as measured by the consumer prices index dropped to a fresh four-year low of 1.6 per cent last month, down from 1.7 per cent in February and lower than the UK government’s target of 2 per cent.
The CEBR believes inflation will remain below 2 per cent for the rest of this year, taking some of the pressure off consumers. With unemployment also falling, forecasters expect real household disposable incomes to grow by 1.5 per cent in 2014, having declined by 0.6 per cent the previous year.
Next year’s Budget, the last before the general election on 7 May, 2015, could herald extra tax cuts of up to £7bn – boosting disposable incomes further still.
The CEBR said: “The Chancellor has proved a master of the timing of electoral economics and most of the economic variables look likely to present a feel-good factor.”
Household spending accounted for 81 per cent of economic growth in 2013, but this is expected to fall to 46 per cent this year as the recovery becomes more balanced. The upturn in the construction sector, helped by UK government stimulus measures such as Help to Buy, also means growth could be less dependent on consumer spending.
Managing economist Scott Corfe, the main author of today’s report, said: “The UK’s economic position has improved significantly since the start of 2013 and we expect solid growth of over 3 per cent this year”.
However, he warned that “challenges remain” on the road to recovery and growth is likely to fall back to 2.2 per cent in 2015, although this is up from the CEBR’s earlier prediction of 2 per cent. “There will be difficult government spending cuts to be made in the next parliament and the parlous state of the UK’s trade position could become a significant economic issue going forward.”
Official figures due for publication on Wednesday are expected to show public sector borrowing – excluding the distorting effect of bank bail-outs – totalled £10 billion last month. This would be down from £11.4bn a year ago, but IHS Insight chief UK economist Howard Archer said the shortfall could mean the Chancellor misses his deficit reduction target.
George Osborne’s goal for the 2013-14 fiscal year was lowered from £111.2bn to £107.8bn in his Budget last month, and Archer said: “It is evident that there is still an awfully long way to go in getting the public finances into decent shape.”
Despite the rhetoric about austerity and “savage” cuts to public spending, the CEBR said Osborne has made “little progress” in cutting total government spending.
Corfe added: “Real government spending in 2014 is expected to stand 1.8 per cent higher than in 2010. Over the course of the next parliament, 2015-20, we expect real government spending to decline by 2.1 per cent as spending cuts kick in. This will weigh on growth prospects in the outer years of the CEBR’s forecast horizon.”