UK is doing OK, but uncertainty looms on mid-year horizon, writes Martin Flanagan
BRITAIN’S economy has sufficient beneficial tailwinds to suggest its current rate of momentum could get a further push in 2015. This would not be too shabby a performance given that we are already one of the best-performing countries in the G7, the envy of the stagnation-bound Eurozone and Japan, in particular.
Experts believe interest rates are unlikely to rise much from historic lows this year, inflation is set to stay low to support what remains a markedly consumer spending-led recovery, and unemployment is set to tumble further after a faster-than-expected fall in 2014.
The CBI employers’ lobby group has forecast UK GDP growth of 2.5 per cent this year and 2016, saying in the New Year message from its director-general John Cridland that last year was a successful one for the economy and that “we have emerged stronger and more able to tackle the challenges ahead”. The Bank of England, whose track record for economic forecasting is admittedly not unblemished, is even more bullish, forecasting growth of 2.9 per cent in 2015 and 2.6 per cent next year.
Most City economists are in this forecasting ballpark area, too. Even worse-than-expected manufacturing figures on Friday have not dented the optimism unduly. The Markit/Cips UK manufacturing purchasing managers index (PMI) fell to a three-month low of 52.5 in December from 53.3 in November (where 50 is the threshold for growth). But, crucially, the index has been in growth for 22 consecutive months.
Howard Archer, chief UK economist at IHS Global Insight, said: “The prospects for domestic demand for manufacturers look reasonable. Hopefully, still relatively healthy consumer confidence, high and rising employment, improving consumer purchasing power and likely reasonably decent housing market activity will underpin demand for consumer durable goods.”
Even if a cause for regret in terms of trying to achieve a more balanced, resilient economy, manufacturing also now accounts for about 12 per cent of Britain’s economic output – well down from the early 1970s when manufacturing chipped in nearly a third of GDP.
It means in 2015, as for decades now, we will remain more dependent on the services industry – accounting for some 75 per cent of GDP and including finance, retail, transport, hotels, pubs and IT – for our wellbeing. And currently that key sector remains robust.
After some apparently fluctuating guidance from the Bank of England last year about the timing of interest rate rises, most economists do not expect an increase from 0.5 per cent to 0.75 per cent before June at the earliest. That should help consumer confidence, as real earnings growth – stripping out inflation – is also now feeding through.
Meanwhile, IHS’s Archer is not alone in expecting unemployment to come down to about 5.3 per cent by the end of this year, after having fallen from 6.9 per cent to 6 per cent in the year just gone. Another positive for prospects this year is that most experts do not believe Britain will sink into dangerous deflation, even though inflation fell to a 12-year low of 1 per cent in November from 1.3 per cent the previous month.
The Centre for Economics and Business Research (CEBR) said last week that inflation could be negative – it already is in the cut-throat supermarket sector – this spring or summer on the consumer price inflation (CPI) measure. But conventional economic wisdom is that such a development has to be seen by businesses and households as likely to be sustained, and therefore put them off spending, for it to be defined as deflationary rather than a transient negative inflation phase.
Most observers in the City do not believe that will happen.
“I do not think that deflation is a serious risk in the UK (unlike the Eurozone) but I do expect inflation to be below 1 per cent through the first half of the year at least,” one said. And even the CEBR, which is not wholly upbeat on either the economic or political outlook, admits: “The UK should continue to do fairly well and growth might surprise on the upside.”
Despite such positives, all is not consensus sweetness and light regarding the outlook. The biggest wild card of all is the UK general election in May, seen as generating significant consumer and business uncertainty.
Nick Parsons, head of research at NAB UK, said: “A real worry is the impact of the general election on business and household confidence. Politics in the UK has not mattered for 20 years because there has been very little difference between the parties.
“But the range of potential outcomes this time is so much greater that it would be understandable if people had a wait-and-see attitude to spending and investment. We don’t know if we will get a government that is committed to the European Union, wants to hold a referendum on membership, or plans to leave the single market.”
Two other potential knock-on repercussions for the UK economy are a worsening of the Eurozone’s troubles – with Greece again catapulted into the crucible of quitting the single currency or continuing to bear an exceptionally painful austerity programme – and a gathering slowdown in the economic locomotive of China.
The Eurozone accounts for 40 per cent of British exports. We can never erect a cordon sanitaire against its financial and economic problems. And the same applies to the global macro-economic headwinds that would be unleashed if Chinese growth falls appreciably in 2015. That country’s factory growth fell in December for the first time in seven months, a worrying straw in the wind.
On balance, then, UK prospects for the year look pretty decent, as good as any we have enjoyed since before the financial crash. But there are caveats in the shape of economic “known unknowns”, to use a phrase of US politician Donald Rumsfeld that could yet blot the picture.