Q4 2015 GDP growth has been revised up to 0.6%, while there have also been upward revisions to growth in previous quarters, mainly due to a stronger than expected performance in the services sector. Full year growth for 2015 is now estimated to have been 2.3%. Downside risks remain, however, with concerns rising over global economic and financial uncertainty and the possibility of Brexit.
Stronger consumer spending in the short term
Household consumption increased by 2.8% in 2015, which is the strongest annual performance since 2007. Inflation is forecast to remain low at around 0.5% in 2016, due to low prices, the recent gas price cuts and weak core inflationary pressures. This, combined with low interest rates and an improving labour market will underpin further improvements in purchasing power and spending this year. Medium term prospects for spending are more subdued, however, due to government plans to reduce welfare spending by around £12bn by 2019, which is expected to more than offset the boost from the introduction of the national living wage.
Subdued outlook for investment and exports
Greater uncertainty, both at home and abroad, has weighed on business sentiment and recent surveys indicate that firms’ are keeping investment plans on hold as they consider the implications of Brexit. Business investment fell by 2.0% in Q4 2015, while the forward looking services PMI indicator for Q1 was at its weakest level for 3 years. The business surveys also suggest that exporters are continuing to struggle, despite the sterling’s recent depreciation.
No change in interest rates in 2016
The UK’s economic fundamentals are strong and healthy labour market conditions should help sustain growth, but uncertainty regarding the EU referendum in June continues to cloud the short term outlook for the economy. The government plans to tighten fiscal policy significantly over the next 3 years, which will impact on sentiment and growth, particularly if monetary policy is tightened too aggressively. Consequently, market expectations for the timing of an interest rate hike have become increasingly dovish since the start of the year, with the first rise now expected in late 2018.
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