UK GDP is expected to grow by 2.5% in 2015, the NIESR (National Institute of Economic and Social Research) announced on Wednesday, and not by the previous 2.3% it had predicted three months ago. It also expects the economy to expand by 3% this year.
The London-based independent research organization and think-tank said that strong investment is offsetting the risks from the Eurozone.
The NIESR says the recovery of the UK economy is still the weakest in the past 100 years “while the UK’s large productivity puzzle persists and, notwithstanding the gradual accumulation of an evidence base, remains largely unsolved,” Simon Kirby, Jack Meaning, James Warren and Jonathan Portes wrote in a report titled “Prospects for the UK Economy”.
While growth in domestic demand seems to be becoming more balanced, business investment is now providing a greater positive contribution since the Great Recession ended.
Business investment is forecast to grow by 9.3% in 2014 and 8.2% in 2015. It will then drop slightly to between 2% and 3% in 2016/17.
The National Institute of Economic and Social Research is Britain’s longest established independent economic research institute.
The Bank of England’s monetary policy is unlikely to be tightened any time soon given the recent weak inflation figures. Over the short term, inflation will continue receiving downward pressure as a result of the pound sterling’s appreciation between March 2013 and July 2014.
The authors forecast an underlying inflation rate of closer to 2%.
“On balance, we think the risk of waiting a few more months to start raising interest rates outweighs the risk from a premature tightening. We have revised our view of the initial increase in interest rates from February to June 2015.”
Unemployment has declined by 1.5 percentage points over the past 12 months, going below the 6% mark in the second half of 2014. Over the forecast horizon, the authors expect the wedge between employment growth rates and the labor force to narrow, with the unemployment rate stabilizing at about 5.5% in 2018.
Public sector net borrowing, at about £97 billion, will be little changed between fiscal year 2014/15 and 2013/2014. In this fiscal year, tax revenues have been lower than expected due to very weak wage growth.
According to the government’s future consumption plan, the public sector should shift into surplus by the end of this decade.
The main domestic risk to economic expansion is productivity growth. Should this fail to improve as the authors expect, the impact on public finances and living standards will be considerable.
The UK will continue to face external risks, including a weaker global recovery and a stagnant Eurozone.