Growth is looking up and consumption and investment are increasing. Inflation is falling at a leisurely pace, the labour market is resilient, and the deficit is on the decline.
Following an especially weak performance in 2012 whereby annual growth was revised down to 0.1%, 2013 has thus far exceeded expectations and the outlook is quite bright. Growth of 1% in the first half of 2013 has stemmed mainly from domestic demand, namely private consumption. Net trade made a positive contribution of 0.3 pp. in the first quarter but this was as a result of a large decline in imports. Growth is forecast at 2.2% in 2014 and 2.4% in 2015. The main risks to the forecast stem from an extension of weak real wage growth, investment being further postponed and the expected upturn in net exports failing to transpire.
Net exports have seen some signs of improvement and contributed by 0.3 pp. to growth in the first half of 2013 but this was entirely in the first quarter of the year and due to a large fall in imports. Exports grew strongly in the second quarter but imports followed suit. Since wage growth is low, the competitive position of the UK improves and import substitution is likely to play a role in rebalancing the economy.
Inflation had generally been on a downward trajectory since 2011 but the quarterly rate ticked upwards at the end of 2012 and the start of 2013 owing to a rise of tuition fees in England and increased prices for food and household goods. However, inflation is expected generally to fall over the forecast horizon with it reaching the Bank of England’s target of
2% at the end of 2015.
Despite the anaemic growth of 2012 and the public sector job cuts, the employment rate actually grew by 1.2% over the period. The forecast is for unemployment to decline slowly from 7.8% in 2013 to 7.3% in 2015.
The fiscal consolidation plan continues and the Spending Round 2013 details the measures until 2017-18. The large decline in the deficit from 11.4% in the financial year 2009-10 to 5.2% in 2012-13 is partly explained by transfers that were independent of the consolidation plan. Owing to the improved macroeconomic outlook and allowing for a subsequent time lag in the fiscal data, the deficit is expected to fall over the forecast horizon to 4.4% in 2015-16. By contrast, the debt ratio will continue rising over the entire period.
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