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ITEM Club & Bank of Scotland Report

UK economy to grow strongly despite political uncertainty

Scottish exportsThe UK economy will grow strongly and shrug off political uncertainty surrounding the General Election, according to new figures.

It is benefiting from a combination of zero inflation, low interest rates and low oil prices, along with evidence that the eurozone is beginning to recover.

As a result the EY ITEM Club expects GDP growth to reach 2.8% for 2015 and 3% for 2016, a much more positive outlook than forecast by the Office for Budget Responsibility alongside March’s Budget.

The past week has also produced figures showing record numbers of people in work and a growth in take-home pay which is helping to encourage consumer spending.

The ITEM Club forecast says the recovery in the UK’s biggest export market should be enough to offset some of the negative effects of the strong pound on UK firms selling overseas.

Peter Spencer, chief economic advisor to the EY ITEM Club will say that whoever forms the next government will get a huge benefit from the currently benign economic climate.

“The economy is taking the general election in its stride as ‘noflation’ trumps politics. The eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016,” he says.

“If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post 7 May should be strong enough to outweigh the effects of any political uncertainty.”

Mark Gregory, EY’s chief economist adds: “With less than a month now until the election, the economy and businesses seem to be powering through relatively unscathed. Despite a softer performance from business investment in recent months, we’re likely to see the pace of spending by firms gather again later this year as companies hone their strategies to tap into buoyant consumer confidence.

‘M&A activity is already picking up as companies look internationally for growth, with Europe attracting a lot of interest from the US, China and the UK. Meanwhile, businesses will be keeping a close eye on what impact the next government’s policies on public services spending and Europe will have on their operations.”

Consumer spending power will continue to be bolstered by low commodity prices and interest rates, according to the forecast. With inflation likely to remain very low through to the end of the year, the MPC is unlikely to raise interest rates until spring 2016. The EY ITEM Club predicts that interest rates will end 2016 at 1.25% and 2017 at 2.25%.

Household disposable incomes are expected to increase by 3.7% this year and consumer spending is set to rise by a more modest 2.8%, pulling the household savings ratio up to 6.5%. The EY ITEM Club says that this stronger consumer picture will more than compensate for slower growth in business investment of 4.5% in 2015, compared with 7.8% last year.

Me Spencer comments: “Consumers are definitely in the driving seat of the UK economy at the moment, with employment picking up, amplified by low prices. But, unlike the Office for Budget Responsibility’s (OBR) reservations, we see little prospect of a credit fuelled binge, with the household debt to income ratio set to remain relatively stable.”

The strength of the Eurozone recovery is the surprise fillip to an already bright outlook for the UK economy, according to the EY ITEM Club’s spring forecast. Recovery in the Eurozone is being driven by recovering consumer confidence and spending, notably in Germany, but also Spain and France.

Consequently trade should begin to add rather than subtract from UK GDP this year. Overall, the EY ITEM Club expects exports to increase by 5.9% in 2015 and 4.9% on 2016.

Mr Spencer says: “The pick-up in consumer demand in the UK’s biggest export market is driving growth here and compensating for the negative effect of the strong pound on exports.

> > The latest Bank of Scotland Report on Jobs shows continued growth of staff placements in Scotland during March, albeit the pace of increase eased. Similarly, demand for staff rose but at a slower rate. However, starting salaries continued to rise sharply, in part reflecting a lack of available candidates.

It was the barometer’s highest reading in three months, albeit one that was below the corresponding index for the UK as a whole.

Donald MacRae, chief economist at Bank of Scotland, said: “Conditions in the Scottish labour market continued to improve in March this year.  The number of people appointed to jobs increased while the number of vacancies grew over the month.  The rate of growth in starting salaries for permanent jobs recovered strongly from February’s 15-month low.  This Barometer suggests the slowdown in growth in January to March will be reversed in the coming months.”

Deputy First Minister John Swinney said: “The Bank of Scotland report shows an improving labour market picture for the fifty-third consecutive month, with demand for permanent staff continuing to increase.

“The report comes at a time when the Office for National Statistics figures published last week show that Scotland’s jobs market is performing well across a range of measures. They showed participation in Scotland’s labour market is at a record high, and Scotland currently has the highest employment rate and lowest inactivity rate of all four UK nations.”

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