The UK economy surprised many people in 2013 and when the final quarter’s GDP figures are published next month, they are likely to show that the economy grew by around 2.0 per cent, double the rate that was expected by most economists at the start of 2013.
The momentum is expected to continue in 2014 helped by stronger job security, falling unemployment and a resurgent property market.
So, what is the outlook for the UK economy for 2014?
The UK economy is forecast to grow by 2.8 per cent in 2014, which would be the strongest performance since 2007.
The services sector – vital to the UK economy as it accounts for almost 80 per cent of all activity – is expected to continue its strong performance helped by continued growth in the resurgent manufacturing and construction sectors.
Unemployment fell faster than expected with the rate falling from 7.8 per cent to 7.4 per cent in the second half of 2013. Unemployment is likely to continue to fall gradually over the year, supporting economic growth through increased job security which will support consumer spending.
The crucial elements to secure the balanced recovery that the government wants to see will be whether business investment increases and if the UK can export more and import less. Trade has been a factor that has negatively impacted on GDP growth in recent years and the strength of sterling is a concern that may hinder a revival in this area.
Business investment is expected to increase as firms finally respond to the improvements in the economy.
Although stronger global growth should help UK exports it remains difficult to see net trade contributing to economic growth unless the UK can rapidly expand its presence in emerging markets as there is only likely to be limited improvements in the Eurozone.
However, growth of 2.8 per cent should make the UK one of the best performing major economies and compares favourably with anticipated growth in 2014 of 1.0 per cent in the Eurozone.
The performance of the UK economy means that during the second quarter of 2014, the economy should finally, after just over six years, become bigger than it was at its previous peak in the first quarter of 2008.
Unemployment dipped much faster than expected in the latter part of 2013. The Bank of England announced its policy of forward guidance on interest rates in August 2013. It said when the unemployment rate falls to 7.0 per cent, it will trigger a review of interest rates. At the time it suggested this would happen in mid-2016. After the rate fell from 7.8 per cent to 7.4 per cent in the six months to October 2013, it now looks like it will reach this level during the second half of 2014.
The rise in the number of people in work could be tempered by firms getting more out of existing workforce as productivity increases. Another factor that could limit the fall in unemployment is that further job cuts are likely in the public sector.
Howard Archer, Chief UK & European Economist, at IHS Global view: “On balance, we expect the unemployment rate to get down to 7.0% during the second quarter of 2014 and to be down to 6.7% by the end of the year.”
Consumer Price Inflation
Inflation fell sharply in the last six months of 2014, down from 2.9 per cent in June to 2.1 per cent in November. It is expected to remain close to the Bank of England’s 2.0 per cent target during most of 2014 and may actually fall below target in the final quarter of the year, though a lot depends on oil prices.
Factors that could push up inflation are if retailers decide now is the time to finally push up prices and increase their profit margins and if employers decide that they can provide bigger salary increases to employees, many of whom have suffered wage freezes or minimal wage rises in the last three years and a reduction in real incomes.
Howard Archer’s view: “Overall, we expect consumer price inflation to average 2.3% in 2014, which would be down from an estimated average of 2.6% in 2013 and would be the lowest average inflation rate since 2009.”
Under the Bank of England’s forward guidance policy, the Bank has said that when the unemployment rate falls to 7.0 per cent it will act as a “staging post” for a review of interest rates.
Although the Bank predicted this would happen in 2016, it now seems likely it will occur much earlier than this, possibly during the latter part of 2014.
However, the Bank has reiterated that it wants to see evidence of a sustained and broad based recovery that includes a real rise in wages before it starts to gradually raise interest rates. The MPC wants to see a more balanced recovery, one that is not so dependent on consumer spending and includes further business investment and a better balance between external and domestic demand.
Mark Carney, the Governor of the Bank of England said in his commentary to accompany the Bank’s last Quarterly Inflation report that the bank will monitor the rise in productivity as well as employment levels and that this dynamic is crucial to the decision on when to raise interest rates.
Howard Archer’s view: “We believe the odds still strongly favour the Bank of England holding off from an interest rate hike in 2014. We think the Bank of England is more likely to hold off from raising interest rates until the first half of 2015.”
The strength of sterling may also impact when the Bank deems a rate rise is appropriate. It believes the strength of the pound could weigh down exports and damage the chances of better balanced growth.
The strength of the pound means the Bank may judge that there has been a natural tightening of monetary policy conditions that means a near-term raising of interest rates is not required.
The pound reached a 28-month high of $1.65 against the dollar in late-December and is likely to remain around this level and trade above $1.60 throughout the year.
Both the pound and the dollar are expected to strengthen further against the euro in 2014, particularly in the first half of the year because economists expect the European Central Bank to take further stimulative action in the early months of 2014.
Howard Archer’s View: “We expect the pound to strengthen from EUR1.20/£ at the end of 2013 to around EUR1.30/£ at the end of 2014, which would be the highest level since 2008.”
Nationwide reported on January 3rd that UK house prices went up by 8.4 per cent in 2014 and that growth was seen in all 13 regions for the 2nd consecutive period, suggesting that although the bulk of the price rises are coming from London and the South East, the market is strengthening across the regions.
The rise in property values is being supported by ultra-low interest rates and by government policy measures designed to support the housing market such as the Help to Buy Scheme and until recently the Funding for Lending Scheme.
In tandem with this the forward guidance policy gives potential homeowners a measure of stability on the level of interest rates for the next year or so.
This has given people greater confidence in their ability to be able to afford to buy a house.
However, the measures have increased demand but this is not being matched by the supply of new property for sale, another factor that could cause house prices to rise and concern that the policies will fuel a house price bubble.
Howard Archer’s View: “House prices therefore look set to see further strong increases over the coming months despite the Bank of England ending Funding for Lending support for mortgage lending, and they could very well increase by around 8% in 2014.”
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