Data published today reveals the UK economy has grown at its fastest rate since the financial crisis, however while there are challenges ahead, a consumer-led recovery is likely.
According to data released today (27 January) by the Office for National Statistics, the UK economy grew by 0.5 per cent in the final quarter of 2014, down from the 0.7 per cent growth seen in the third quarter.
For 2014 as a whole, the economy grew by 2.6 per cent - the fastest rate since the financial crisis.
Scott Corfe, head of UK macroeconomics at the Centre for Economics and Business Research
Looking ahead, Mr Corfe believes the UK economy faces a “number of challenges” this year.
He warned that uncertainty over the outcome of the UK’s May general election as well as events in the eurozone are all going to act to “dampen” business investment.
Economic weakness in the EU, which still accounts for about half of the UK’s goods exports, means that a trade and manufacturing-led recovery is a “remote possibility”, Mr Corfe added.
However, offsetting this will be a “significant consumer-driven” boost to the economy. In particular he flagged up that inflation has declined drastically as it is currently at 0.5 per cent and is “likely to dip” into negative territory over the coming months, as the prices of food, gas and petrol fall back.
At the same time, earnings growth is expected to double from about 1 per cent in 2014 to more than 2 per cent in 2015, which will pave the way for sizeable growth in living standards.
“It may take a while for consumers to feel the benefits of faster pay growth and falling inflation – our consumer survey research with YouGov shows most households still feel that their financial situation is deteriorating.
“However, we anticipate a turning point over the coming months as consumers start to notice the gains in their wallets. This will lead to an acceleration in consumer spending in 2015, helping the UK economy to achieve a similar rate of growth to last year despite fragility in the eurozone.”
Samuel Tombs, senior UK economist at Capital Economics
Mr Tombs agreed that while the GDP estimate shows the economic recovery slowed a little near the end of the year, “the recent sharp fall in oil prices suggests that it should regain some vigour in early 2015”.
“Admittedly, the economy’s growth in 2014 has been partly driven by some unsustainable stimuli, including households saving less and a modest loosening of fiscal policy.
“And the UK’s general election looks likely to lead to a hung parliament, which could foster a period of political uncertainty that dampens investment and confidence.”
However, Mr Tombs’ view is that the recent halving of oil prices providing a timely boost to households’ discretionary spending power, credit still becoming cheaper and pay growth on an improving trend, GDP growth could pick up to 3 per cent this year.
“In short, we think that the best days of the UK’s recovery may still lie ahead.”
Ben Brettell, senior economist at Hargreaves Lansdown
Mr Brettell pointed out that while slowing growth is “undesirable”, it should prove no cause for concern.
The IMF recently downgraded its global growth forecast, but left its prediction for UK growth in 2015 unchanged at 2.7 per cent. However, its chief economist Olivier Blanchard cautioned that the weakness of the eurozone could act as a “brake” on the British economy, Mr Brettell said.
The most significant development in recent months has been the sharp fall in the oil price, which is now feeding through to lower retail energy costs. This, combined with the return of wage growth, should keep “consumer spending strong and the economy buoyant”.
Mr Brettell added that despite relatively strong growth, the falling oil price is keeping a lid on inflation and should mean interest rates stay lower for longer.
donia.o’loughlin@ft.com
