By Richard Johnstone | 14 April 2014
The UK’s recovery will move onto a firmer footing this year, the EY Item Club has said today as it upgraded its growth prospects for the economy.
The economic forecasters, who use the same models for the economy as the Treasury, said the ‘decent but unspectacular’ expansion of 2.9% in 2014 would also see wages increase faster than inflation for the first time in six years.
Peter Spencer, chief economic advisor to the Item Club, said that the recovery has been financed by lower households saving, but it now appeared to be based on broader economic measures, meaning the club could upgrade its 2014 growth prediction from 2.7%, made in January. The economy grew by 1.7% in 2013.
‘The consumer upturn will be given a boost from real wages and rising employment, while investment is finally kicking in,’ he said.
‘We are set for a long period of low inflation as pressures from commodity prices and the labour market – traditionally the two main suspects in the UK inflation drama – remain largely absent.
‘This will allow the [Bank of England’s] Monetary Policy Committee to leave interest rates on hold until after the election, helping to stimulate further investment growth and limiting household spending on mortgage payments.’
The economic growth projection is 0.2 percentage points above the prediction made by the Office for Budget Responsibility in last month's Budget.
The report also concluded that Chancellor George Osborne’s target for the UK to have the highest employment level in the G7 group of countries could be met by 2017.
In its projections in today’s Spring Forecast, the Item Club concluded employment rate would increase from 71.2% of those aged between 16 and 64 last year to 73.7% in 2017. This might be enough to put the UK at the top of the list of G7 nations, which was topped by Germany in 2013, with an employment rate of 73.3%.
‘The chancellor’s target is in sight, helped by increased labour market participation,’ Spencer said.
‘We estimate that the labour supply will be boosted by another 700,000 over the next two years, as a result of immigration, older workers working for longer and government reforms to move people from welfare into the workforce.
‘This performance might not be quite enough to put the UK at the top of the G7 league tables but it will not be far off.’
