The British Chambers of Commerce (BCC) has upgraded its UK 2014 economic forecast to 3.1% from 2.8%, while its 2015 forecast has increased to 2.7% from 2.5%. The 2016 prediction of 2.5% growth remains unchanged.
If UK GDP (gross domestic product) does manage to grow by 3.1% this year, it will be the largest increase in seven years, says the BCC. It expects GDP growth for the second quarter of 2014 to exceed its pre-recession peak in Q1 2008.
BCC Director General John Longworth, does warn however, that Great Britain “still has a lot of work to do to ensure long-term growth prospects.”
Over-reliance on consumer spending
The United Kingdom relies too much on consumer spending as the main driver of growth, hence the predicted growth slowdown in the next two years.
Although the recent strong growth in business investment is great news, Longworth reminds people that it is from a low base. To be able to sustain investment over the long term, businesses need confidence from the Bank of England and the government, he adds.
Below are some highlighted data from the BCC:
- The 2014 GDP forecast upgrade was mainly due to greater-than-expected economic growth in Q1 2014.
- The 2014 and 2015 forecast upgrades are also linked to better-than-predicted performances from all the main sectors of the economy. Better job prospects will also contribute to stronger GDP growth.
- Although consumer spending will continue being the main driver of growth, it will represent a declining proportion of GDP, especially after the benchmark interest rate starts to rise.
- The main contributor to economic growth during the next 36 months will be services. However, construction and manufacturing will also record satisfactory growth.
- Business investment is forecast to increase by 8.8% this year, 7.4% in 2015, and 7.4% in 2016.
- The BCC predicts that the first increase in interest rates will occur in the first quarter of 2015, and will be to 0.75%. Further 0.25 percentage point increases are then expected, reaching 1.25% in Q4 2015 and 2.25% at the end of 2016.
Britain leading other major economies
Mr. Longworth said:
“Our forecast confirms that Britain is leading, rather than following, other major economies when it comes to short-term growth, which is great news. Businesses up and down the country should be congratulated for their hard work and determination in the face of many challenges over recent years. But make no mistake – we still have a lot of work to do.”
Mr. Longworth adds that all must be done to prevent slower growth in future. The country needs to invest, innovate, export more and build. In order to keep investments growing strongly, he urges the Bank of England to resist an interest rate hike for as long as possible, and to make sure that any future increases are “gradual and modest”.
The BCC’s Chief Economist, said:
“Though our GDP forecasts have been upgraded, we are predicting a marked slowdown in the pace of growth, from 3.1% in 2014 to 2.5% in 2016. This will mainly reflect a deceleration in household consumption growth, and falling public spending as a share of GDP. Together, these factors will more than offset increased contributions to GDP from investment and net trade.”
“As official interest rates start rising, probably in early 2015, indebted households with mortgages will come under increased financial pressure, and the weakening in household consumption will be a key factor in lowering GDP growth.”
The UK economy is doing well, but the country still has a lot of work to do, says the BCC.
The Confederation of British Industry reported that economic growth in May registered a record high; the greatest GDP growth since 2003.