By Daniel Hunter
UK GDP is projected to grow by 1.1% this year after a 0.2% rise in 2012, with the current modest pick-up in the economy being driven by the consumer in general, and the housing market in particular, according to the latest Ernst & Young's Item Club report.
With consumer confidence returning and the Government’s initiatives to stimulate the housing market bearing fruit, consumers are switching their attention back from saving to spending.
So far, so unbalanced. However, the better news is that from 2014 the consumer-led recovery will morph into much more balanced growth, as business investment and exports begin to rise more strongly. As a result, UK GDP growth will accelerate to 2.6% in 2015, and stay at around that level through to 2017.
GDP growth: UK GDP is set to grow by 1.1% this year. This is the same rate as in 2011, but on that occasion the nascent recovery was cut short by the Eurozone crisis, which hit exports and business investment hard. This year’s renewed growth is being driven mainly by consumer spending and the reviving housing market.
However, this time around the recovery looks much more sustainable, and should be given legs by a rebound in business investment and exports from 2014. Combined with a continued revival in consumer confidence and spending, these factors will see UK GDP growth accelerate to 2.2% in 2014 and 2.6% in 2015.
The housing market: With UK consumers having focused on paying off their borrowings in recent years, UK household debt is now much better aligned with personal incomes, meaning consumers are ready to save less and spend more of their income. This shift will be supported by the Treasury’s well-timed initiatives to revive the mortgage market, which are triggering a steady acceleration in activity that will translate into national house price growth of 2.25% in 2013 and 5.5% in 2014. Beyond that the recovery should gain further momentum, as credit availability, incomes and employment all continue to improve.
Exports: Continuing weakness in the UK’s main export markets means the Government’s long-term plan to rebalance the economy away from consumption and towards exports and investment remains on hold. However, the global economy has been rebalancing remarkably well, and the outlook for UK exports is set to brighten markedly from 2014, driven by a strong US recovery.
This improving trend will be supported by China’s shift of emphasis from investment and infrastructure building towards consumption — which will both open the door for UK exporters of consumer goods, and also reduce upwards price pressure on commodities that the UK imports. As a result, the UK’s current account deficit should narrow significantly during the coming years.
Consumer spending: The consumer recovery has been surprisingly robust during the past 18 months, underpinned by a pick-up in real income growth, rising employment and lower inflation. With the gradual improvement in economic activity boosting confidence, annual consumer spending growth will rise from 1.1% in 2012 to 1.7% this year, before accelerating further to 1.9% in 2014 and 2.4% from 2015-17.
However, with many households continuing to pay off debt, these year-on-year increases will be well below the annual average of 3.7% in the decade up to the financial crisis.
"Our latest forecast points to an improvement in the UK economic environment over the next couple of years. For companies to ensure they’re fully prepared to capitalise on the return to growth conditions, there are three priorities they need to focus on today," Mark Gregory, Ernst & Young Chief Economist, said.
"The first is to ensure they have a robust platform from which to exploit new opportunities. This includes reviewing investment plans, ensuring the right funding is in place to execute them, and reassessing M&A targets and strategies. The key is to have strategic options that can be quickly executed as market conditions improve. Close monitoring of key indicators is essential.
"The second priority to determine is whether the company’s current business model is appropriate for the future environment. Can the business scale up if needed? Is the workforce the right shape and size — especially given the possibility of wage inflation returning, and the war for talent intensifying, as growth picks up? And are there any unpeforming business units that could be divested for good prices?
"Third, companies should not forget about Europe. True, the Eurozone is troubled at the moment. But Europe remains a major economic bloc on our doorstep, and UK companies need to define clearly where it fits into their portfolio, and their longer-term plans for it. However, having contingency plans for any event remains an important and sensible position.
"In making these preparations, companies have no time to lose. With growth set to accelerate from 2014, the decisions and actions taken in the second half of 2013 will determine who gets off to a flying start — and who’s left playing catch-up."
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