By Daniel Hunter
Housing and the high street will continue to drive the UK’s short term growth, according to the Ernst & Young ITEM Club, with over one million housing transactions expected by the end of the year and rising disposable incomes keeping the tills ringing.
In its latest quarterly forecast, the Ernst & Young ITEM Club says that the increase in the personal allowance and the Government’s Funding for Lending will maintain the momentum of the recovery and will be further boosted in 2014 by the introduction of the Help to Buy Scheme.
The Ernst & Young ITEM Club is forecasting GDP growth of 0.6% this year, before increasing to 1.9% in 2014 and 2.5% in 2015.
“With export markets continuing to disappoint, the Chancellor has focussed his firepower on the home front. And the timing couldn’t have been better," Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, commented.
"Real incomes are already starting to recover, mortgages are becoming more readily available, and homes are more affordable as the house price to earnings ratio continues to fall.
“Although it’s not a long term strategy, stimulating the housing market and the high street will keep GDP growth positive. Unbalanced growth is better than no growth.”
According to the report, the increase in the personal income tax allowance will add 0.4% to disposable incomes over the next two years. Combined with strong employment levels, which have allowed income growth to overtake inflation, the Ernst & Young ITEM Club expects someone earning the national average salary of £23,000, to have an extra £280 in their pocket by the end of the year.
Peter Spencer says that the extra cash in our pockets will feed through to higher levels of spending on the high street.
“At last, there’s some good news for household finances. We should start to feel slightly better off this year, which will help to loosen the purse strings," he said.
"Consumer spending added 0.7 percentage points to GDP in 2012 and the Chancellor’s Budget will help ensure the tills continue to ring for some time yet.”
The Ernst & Young ITEM Club report expects consumer spending to increase by 1.2% this year and 1.9% in 2014. But the 2.2% growth predicted from 2014-16 is well down on the 3.7% a year it averaged in the decade prior to the financial crisis.
“Don’t expect a return to pre-crisis levels of spending”, warns Spencer. “Consumers have been burnt by the experience of the recession and are much more cautious with their finances. Households are likely to continue paying down debt rather than racking up huge credit card bills.”
Personal debt levels are currently 146% of disposable income last year, down from the peak of 174% in 2007. The Ernst & Young ITEM Club says this is likely to stabilise at around 136% by 2016.
But that’s where the good news ends. The improved outlook for the housing market and high street is offset by a poor performance in the UK’s European export markets. According to the report, the UK will have to wait until 2015 before exports start contributing positively to economic growth.
Mark Gregory, Ernst & Young’s chief economist explains: “Exports to China and India are growing surprisingly strongly but weak demand from Europe, which takes the lion’s share of our products and services, has severely dented the UK’s overall trade performance.
“Although there are some encouraging signs from the strength of the US recovery, UK exporters can’t afford to wait for their traditional markets to recover. The Eurozone is heading for a prolonged period of weakness, so companies need to grasp the nettle and ramp up their activities in emerging markets or risk missing out to competitors.”
Net trade is expected to subtract 0.2% from GDP in 2013 and again in 2014, before adding 0.1% in 2015 as world trade picks up.
Concluding, Spencer says that despite the Budget boost, the outlook for the UK economy remains pretty gloomy: “With the rebalancing of the UK economy on hold, we’re once again relying on the consumer to see us through. Unless we see a dramatic turnaround in Europe, UK growth is likely to remain sluggish at best.”
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