Press Room

Angela Monaghan The Guardian, Monday 14 April 2014

Britain’s economy will enjoy “decent but unspectacular growth” with wages rising in real terms for the first time in six years and low inflation allowing the Bank of England to avoid raising interest rates before next year’s general election, according to a group of economic forecasters.

The EY Item Club has raised its growth forecast for 2014 to 2.9% from an earlier forecast of 2.7%.

That is in line with the International Monetary Fund’s forecast but above the 2.7% growth predicted by the Office for Budget Responsibility (OBR) in last month’s budget.

Item is expecting weaker growth of 2.3% in 2015.

Low inflation will allow the Bank of England to keep rates on hold at their historic low of 0.5% until the third quarter of next year, the group said.

Members of the rate-setting monetary policy committee have, however, said in recent weeks that the first rise in rates will most likely come earlier, in spring next year.

“The economic recovery is becoming more entrenched and better balanced. Although consumer spending has continued to play the biggest role in driving growth, investment is increasingly making its presence felt,” the economists said in their spring forecast.

“While the UK economy is not completely out of the woods, 2014 should see a year of decent, if not spectacular, growth.”

However, in a blow to the chancellor George Osborne, the forecasters cast doubt on whether government spending cuts still to come were “really deliverable”, with the UK still only halfway through planned austerity.

“The squeeze on spending over the next few years is forecast by the OBR to take government consumption of goods and services to its smallest share of GDP since at least 1948.

“In the context of an ageing population and public demands for better public services, this will be very difficult to achieve.”

Britain can look forward to rising living standards this year, the report suggested, with wage growth of 1.7% finally outpacing inflation of 1.6% after six years of falling real wages.

The forecasters predicted a 9.1% rise in business investment this year and 9.5% next year, boosted by the low cost of capital, a large amount of cash in company coffers, and confidence in company boardrooms.

“We are set for a long period of low inflation as pressures from commodity prices and the labour market – traditionally the two main suspects in the UK inflation drama – remain largely absent,” said Peter Spencer, chief economic adviser to Item.

Inflation has been falling over recent months and in February hit 1.7%, the lowest level in more than four and a half years and below the Bank of England’s 2% target.

City analysts said the latest official data, to be published on Tuesday, is likely to show that food, petrol, and airfares pushed annual inflation lower still in March to 1.5%.

The report suggested that an improving jobs market would be central to the rosier economic outlook.

Wage inflation would be kept under control by a swelling workforce buoyed by people working for longer and coming off welfare and into work.

The chancellor’s belief that the UK could achieve the highest employment rate in the G7 is a reasonable one, it said.

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