UK growth strongest since 2007

UK growth for 2014 is expected to be 2.9%, making performance over this year the strongest since 2007

UK growth for 2014 is expected to be 2.9%, making performance over this year the strongest since 2007. Growth will ease slightly during 2015, as falling consumer and business confidence is likely to precede a slowing of household consumption and investment expenditure. Further out, cuts to government spending are likely to bring down the budget deficit and weigh on growth.

The first half of the year showed rapid growth, with signs pointing to slowing, but still strong, performance in the second half. Consumer confidence peaked in May, having been bolstered by two factors: house price growth and new job creation. Average house prices increased by 11.9% year on year on the latest (August) reading – the highest figure since the financial crisis – inducing homeowners to spend more as they become wealthier. However, mortgage approvals have been falling and September’s total was the lowest in over a year. As a result, house price growth is expected to start to slow. As for the second factor, a record-breaking year-on-year fall in unemployment of 538,000 for the June-to-August period has taken the unemployment rate from 7.7% to 6.0%, helping to increase overall demand in the economy.

The weak spot in the recovery has been wage growth. This has been below 1% year-on-year for the past five months and consistently lower than inflation. Wage growth has only exceeded price growth during one month over the past year. Apart from this, the UK’s recovery has generally been strong and broadly based across the three main sectors of production, construction and services.

The main downside risk comes from the global outlook, which has deteriorated markedly in recent months. The Eurozone’s crisis has moved from the periphery to the core and the danger has moved from sovereign debt to deflation. Deflation, where consumers put off purchases in order to wait for lower prices, firms delay investments and debts rise in real terms, has become reality for individual Eurozone members and a distinct prospect for the currency zone as a whole. Other major economies are experiencing the same trend: consumer price inflation in most major economies is below most central banks’ target levels. The root cause is a global weakness of aggregate demand and high commodity supply, meaning key prices such as oil and food are at low levels.

While superficially beneficial for UK consumers whose wages are stagnating, a deflationary slowdown in other senses has potentially severe consequences for the UK’s largest foreign market, the Eurozone, and the many UK businesses which depend on exporting to it. In response, the Bank of England has sought to reassure markets that a rise in interest rates is less of a pressing concern than it was. Most forecasters have adjusted their expectations for the next rise backwards to mid-to-late 2015, instead of the earlier part of the year.

Formal defaults during Q2 2014 returned to levels not seen since before the financial crisis. The total of 4,438 was the lowest quarterly figure since Q4 2007. Firms have very little pressure over costs at present, and demand in the UK market at least is set to grow over the medium term.

Definition: A formal default is defined as a company entering into administration, receivership, company voluntary appointment or liquidation.