UK: Economic recovery ‘firmly on track’, according to Ernst & Young report

Recovery is on track, report says

Recovery is on track, report says - Credit: PA

Rising consumer spending and a surging housing market have put the UK’s recovery firmly on track, according to an influential forecasting body.

The Ernst & Young Item Club said the UK’s recovery has “finally got legs”, as it almost doubled its forecast for growth this year to 1.1%, up from 0.6% just three months ago.

Government schemes will continue to spur the housing market, it said, but added that consumers will fund higher spending by dipping into their savings, rather than through a big increase in household incomes.

However, Item said a rebalancing of the UK economy remains unlikely this year, with subdued exports and growth driven by consumers.

It expects a long-awaited revival in exports and business investment next year, reflecting a recovery in the United States, pro-growth policies in Europe and a shift towards consumption in China.

Professor Peter Spencer, chief economic adviser to the Item Club, said: “It’s looking much more positive and we’re unlikely to see a repeat of 2011 when a recovery in confidence was crushed by the euro crisis.

“Spending on the high street is holding up nicely, housing market transactions are beginning to gather pace and, perhaps most significantly, the global economy also appears to be on the mend.”

Most Read

The Government’s Help to Buy and Funding for Lending schemes have been credited with driving a housing market recovery in recent months. Mortgage approvals soared to a three-and-a-half year high in May and house prices rose at their fastest rate for almost three years in June.

Help to Buy allows people to buy a home with a 5% deposit, aided with a loan of up to 20% from the Government. It will be extended next year to include a state guarantee for mortgages.

Funding for Lending has helped drive down mortgage rates and increase availability of higher loan-to-value deals, by offering banks and building societies discounted funding in return for increases in lending.

Mr Spencer said the housing market is “performing better than we could have hoped for and the momentum looks set to build”.

Item expects house prices to rise 2.3% in 2013 and 5.5% in 2014.

Various surveys have also pointed to rising consumer spending and recovering high street sales. Like-for-like retail sales rose 1.4% in June on a year earlier, following a 1.8% gain seen in May, an industry survey said recently.

Despite only modest increases in real incomes, Item expects consumer spending to increase 1.6% this year and 1.9% next year. However, it predicts the savings ratio will dip to 5.6% from 6.3% last year.

Total pay increased by 1.3% in the year to April, official figures showed recently, failing to keep pace with inflation of 2.7%.

The economy is widely expected to have grown by at least 0.5% in the second quarter, from 0.3% in the first quarter.

Item believes gross domestic product (GDP) will accelerate to 2.2% in 2014 and 2.6% in 2015.

Prof Spencer said: “There are hopeful signs for the world economy, which will lead to a pick-up in demand from the UK’s key export markets.

“The US has successfully negotiated the fiscal cliff, the Chinese economy is beginning to rebalance away from investment to consumption, and there is also a move towards pro-growth policies in the eurozone.

“If managed successfully these factors could be a real boom for UK exporters.”

It predicts export growth will remain subdued at 1.2% this year, before surging to 4.6% next year.

Item stands for Independent Treasury Economic Model, and uses the Treasury model for its analysis.