By Richard Johnstone | 20 January 2014
UK growth is set to reach 2.7% this year as consumer spending continues to recover following the economic crisis, the Ernst & Young Item Club has predicted today.
The economic analysis, which uses the Treasury's own model to predict the state of the UK economy, also concluded that unemployment was set to fall below 7% in the first half of this year. This is the level at which the Bank of England has said it will consider raising interest rates.
However, in its Winter forecast, published today, the Item Club warned the economic recovery would be ‘lop-sided’ without increases in business investment and exports. According to the analysis, consumer spending will drive up growth by 0.8 percentage points compared to 2013.
However, it warned that expansion in future years was unlikely to be smooth, with growth falling back to 2.6% in 2015 and then further to 2.5% a year in both 2016 and 2017.
Peter Spencer, chief economic advisor to the EY Item Club, said that in the short term, the economic recovery would continue to be driven by consumer spending and housing.
‘The next two years will see businesses start to do their share of the heavy lifting to ensure a more balanced recovery. For positive surprises we need to look to companies, not consumers as business investment and exports finally make an impact.’
The analysis called on the Bank of England to supplement its forward guidance, which currently rules out a rise in interest rates until unemployment falls below 7%, by stating that no rise will be considered until there is sustained growth in real wages.
Under such forward guidance, it was likely that rates would not increase from the current historic low of 0.5% following the economic crisis until the autumn of 2015.
Spencer warned that earnings weakness could prove to be the weak spot in the recovery.
‘Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.’
