UK economy set to expand at fastest rate since 2008, EY forecasts

Economic growth in 2015 in the UK looks set to hit a seven-year high, with rapid expansion expected.

The UK’s economy is forecast to grow at its fastest rate in seven years, according to the latest quarterly forecast from the EY Item Club. Driving the economy forward will be a sustained period of inflation averaging around zero per cent, while real disposable income is expected to increase significantly.

Commodity price fall will spur UK economy higher

It seems the collapse of the prices of oil and other commodities will provide a ‘shot in the spending arm’ for the consumer of Britain, who are set to see their purchasing power increase by 3.7 per cent, according to the report.

Lower prices will in turn help inflation average around zero during 2015, perhaps even entering negative territory in first few months, which will then see the predicted interest rate rise from the Bank of England pushed back until later in the year, or perhaps even 2016.

“Given the rapid change in outlook, original business forecasts for 2015 might now be too conservative, at least for consumer facing companies,” said Mark Gregory, EY’s chief economist.

“Businesses now need to dust off these plans and adjust them to reflect the new reality of falling oil prices and growing consumer spending,” he added.

Consumer spending will lift GDP

To reflect these changes EY Item Club’s winter forecast puts GDP growth at 2.9 per cent in 2015, that’s 0.5 percentage points higher than the original forecast and the highest it would be since 2008.

This boost will likely be powered by consumer spending as real household consumption is expected to increase by 2.9 per cent in 2015 and by 2.6 per cent in 2016, as the average consumer enjoys a period of wage growth far outstripping inflation, putting more money in their pocket.

Housing market will pick up from rate hike delay

Furthermore, the anticipated delay to the interest rate hike, and a softening of expectations of house price rises, is forecast to bring about a boost to the housing market.

“The slowdown in the mortgage and housing markets last year was partly due to expectations of rising interest rates, which are now less of an immediate threat,” said Peter Spencer, chief economic advisor to the EY ITEM Club.

“Real incomes are a major driver for the housing market and as they increase we should see renewed momentum this year,” he added.