UK Macro Economic Forecast
CONTENTS 1. Summary Prospects Key Risks 2. Recent Trends PMI Services GDP % q-on-q 3. Two Year Outlook GDP % y-on-y Investment 4. Longer Term Outlook 5. Consumers Consumer spending Consumer Confidence Private consumption 6. Labour Market 7. Trade Total Employment ILO Unemployment Rate Exports Government Budget Balance 8. Public Finances 9. Inflation Rate If you like this sample forecast you can purchase the latest full version of this forecast here. Visit our website to browse our range of forecasts and services a. Prospects & Key Risks b. Prospects & Key Risks
Summary Economy back on track The economy got back on track in 2015q2 with growth at 0.7% q-on-q. Expansion remains driven by consumer spending as export-reliant industries continue to struggle against the backdrop of a strong pound coupled with sluggish demand from the EU. But despite the unbalanced nature of the upturn, prospects are encouraging. Consumer incomes and spending for the rest of this year remain propitious with inflation set to remain subdued, wage growth accelerating and underlying labour market conditions still robust. We expect the economy to grow by 2.6% this year and 2.2% in 2016, with an upside risk that a Eurozone recovery will boost exports, allowing growth to exceed this pace. The Greek crisis has, in the short term at least, been defused reducing the key downside risk to our forecast of a steadily improving UK economy over the next two years. UK 2013 2014 2015 2016 2017-2020 National accounts (% change, real terms) Avg GDP Consumer spending Investment Government Exports Imports Other Indicators Employment (% change) Unemployment (% workforce) Consumer Prices (% change) Fiscal Balance (% GDP) Current account balance (% GDP) Bank Rate (% p.a.) 10yr bond yield Exchange rate (US$ per )
Economy still growing at a solid pace The first estimate of GDP for the second quarter of 2015 confirmed our expectations that the economy bounced back strongly in the spring, growing by 0.7% q-o-q, up from 0.4% in 2015q1. The latest release also confirmed that GDP-per-head is finally back to pre-recession levels. Consumer spending will sustain GDP growth at a healthy pace, 2.6%, in 2015 as a whole. Spending is buoyed by zero inflation and the steady increase in wage growth which reached 2.8% excluding bonuses in the year to March-May. We expect 2015q3 will see a solid performance in terms of GDP growth. Survey evidence for July was mixed but on the whole shows encouraging expansion in construction and services and mild growth in manufacturing despite a challenging backdrop in overseas markets. The two-year run of very positive developments in the labour market was interrupted with the publication of figures for March-May. Unemployment rose slightly while the number of self-employed people fell by 55,000, driving the change in employment into negative territory. Nevertheless, the underlying strength of the labour market is still intact and will continue to strengthen household budgets. With the first rise in interest rates expected to be in late 2015 or early 2016, a significant impact on exposed households and on consumer demand will not be felt until 2017 or even 2018. The strong economic performance of the past two years means that the UK economy has recovered ground lost during the great recession and its aftermath more quickly than seemed likely a few years ago. But the repercussions of the recession and the ongoing travails of the Eurozone are set to hamper economic progress for a few years yet. Key risks The Eurozone's problems still cast a cloud over future performance. The defusing of the Greek crisis has eased risks in the near term, but the problem is fundamentally unresolved posing a downside risk to medium-term European and UK growth prospects. Export weakness is a continuing source of concern. Net trade is likely to remain a drag on UK growth prospects with weak overseas demand and a strong pound dampening the outlook for UK exports. There is an upside risk to the forecast if a Eurozone recovery boosts exports. The recovery looks reasonably secure but there are pitfalls ahead, notably the need to extend fiscal restraint. The impact of tighter monetary policy from late 2015 or early 2016 at a time of fiscal restraint could constrain growth. Uncertainty regarding the UK s future in the EU could depress investment, especially from foreign investors.
UK Recent Trends Business Planning Assumptions 2-Year Outlook Longer-Term Outlook Consumer Trade Inflation Prospects & Key Risks GDP growth was 0.7% q-on-q in 2015q2 as the economy rebounded from its q1 weakness. The UK economic upswing remains on track with recent indicators pointing to solid growth in 2015q3.. Bank Rate on hold at 0.5% until late 2015 or 2016q1. Rises will be gradual and the rate will be low by historic standards in 2017-20, at around 2.3%. Real GDP growth forecast at 2.6% in 2015 followed by near 2.2% in 2016 and 2017. Key risks: Weaker growth if Eurozone fails to sustain recent recovery and investment suffers from Brexit fears. GDP growth of 2.3% a year in 2016-21, with annual employment growth of 0.7%. Key risks: Efforts to restore public finances coupled with higher interest rates and weak external demand constrain growth more than expected. Healthy rate of spending to be sustained as growth in real incomes remains strong. Key risks: Earnings growth setback; Bank Rate hike hits highly-exposed borrowers in 2017/18. Export outlook constrained by strong pound and weak overseas demand. But recent Eurozone recovery provides an upside risk. Key risk: Eurozone recovery proves short-lived. Inflation will pick up in 2015h2 from recent exceptionally low levels, but is unlikely to exceed 1% in 2015. Key risk: Bank Rate rise earlier than needed (seeking to begin normalisation of rates) constrains economic growth at a time of fiscal tightness. Interest rates Extremely low inflation, sterling s strength,, downward pressure on oil prices and still tolerable rises in wage costs point to no early rise in official rates. The latest published vote of the Monetary Policy Committee at their June meeting was unanimously for no change. We expect the first rise, a 25 basis point increase taking Bank Rate to 0.75%, to take place in the first quarter of 2016, but recent statements from the Bank of England hint at a rise in the last few weeks of 2015. (% per annum) 2013 2014 2015 2018 Base rate (y/e) 0.50 0.50 0.50 2.42 10 yr yield (y/e) 2.79 2.08 2.60 4.50 KEY RISK Inflation can pick up quite sharply given the impact of the base effect ( a fall in prices a year ago dropping out of the calculation and being replaced by a rise). If this rise proves steep, the base effect could become a key factor in driving inflation up markedly later this year, especially if oil prices rise. Exchange rates Favourable UK economic indicators and uncertainty in the Eurozone have kept sterling strong. We expect sterling to settle in the range $1.55-1.59/ in the next few months but to make further modest gains in 2016 and 2017. Sterling will also hold on to most of this year s gains against the euro in the coming months. 2013 2014 2015 2018 Labour Market Labour market progress will remain solid in the next few months in line with expected output gains. Key risk: Private sector job creation fades as productivity gains account for output rise. US$ per (y/e) 1.56 1.65 1.52 1.65 per (y/e) 0.85 0.81 0.74 0.77 REER (Jan 2005=100) 83.0 88.3 90.0 91.7 KEY RISK Government Fiscal tightness to continue until 2019. Key risk: Combination of tighter monetary policy and ongoing austerity damages growth prospects. strength vs the continues to exacerbate problems for exporters already struggling with weak orders. Experian Economics 5
Consumers Positive backdrop continues Consumer confidence still high. Household budgets continue to benefit from extremely low inflation, an accommodative monetary policy and most recently the acceleration of wage growth. According to the latest ONS data, earnings growth is now advancing at around 3% year-on-year. Recent ONS labour market data also showed positive employment creation with the number of full-time employees up 30,000 in March-May compared with the previous three months. The two-year run of very positive developments in the labour market was interrupted with the publication of figures for March-May. Unemployment rose slightly while the number of self-employed people fell by 55,000, driving the change in employment into negative territory. Nevertheless, the underlying strength of the labour market is still intact and will continue to strengthen household budgets. The impetus is likely to come increasingly from earnings growth and less from employment creation as productivity gains are at last emerging. We expect real incomes to rise by 3.4% in 2015, the strongest outcome since 2001, and this will continue to underpin the current consumer boom, with consumer spending rising by 2.7% this year. boosting consumer spending We expect real income growth to moderate in 2016 with growth at 1.9% as inflation picks up from the very low level characterising 2015 and given the impact of welfare cuts. Official interest rates are unlikely to begin rising until late 2015 or 2016q1, with most households not feeling a significant impact until 2017. This means that despite fiscal austerity household spending can continue to advance at a solid pace, 2.2% in 2016. 6
Labour market Employment eases as earnings rise Services job creation drives employment growth The labour market remains strong though showing a more mixed outcome than during the past two years of almost uninterrupted strength across the board. The key points that emerged from the latest ONS release comparing March-May with the previous 3 months were: Employment was down 67,000, The number of employees was up 5,000 but the number of self-employed people fell by 55,000 Unemployment rose by 15,000 The unemployment rate remained at 5.6% Average weekly earnings excluding bonuses rose by 2.8% compared with a year earlier; including bonuses the rise was 3.2%. Although the headline figures are disappointing, the details suggest that underlying momentum remains strong. Full time employment continues to rise, wage growth remains on an upward trajectory and underemployment measures are still unwinding. Steady decline in unemployment In the coming months we expect growth in employment to resume, but at a more modest rate than seen over the previous 18 months. Earnings growth is also expected to remain healthy and with CPI inflation easing to 0.0% in June, household incomes should remain on a recovery path in the coming months. 7
Our economic forecasting expertise Experian's team of 20 economists is a leading provider of global, national, regional and local economic forecasts and analysis to the commercial and public sectors. Our foresight helps organisations predict the future of their markets, identify new business opportunities, quantify risk and make informed decisions. Experian Market Intelligence Group Would you like to understand how your credit portfolio compares to your peers and how it is likely to be impacted by changes in lending policy, market competition and the economy in the future? Our experts in economics, credit risk, construction, market analysis and portfolio benchmarking combine to provide an in-depth understanding of the market and economic context in which you manage your business both now and in the future. How we can help you: An independent unbiased view of the market based upon quantitative analysis of data. Benchmark your portfolio against your peers, both now and forecast into the future Provide economic forecasts specific to your sector Develop accurate business case(s) for entry into new markets Assess future market risk and predict potential economic pressures at a granular level Highlight future revenue opportunities Meet regulatory requirements for stress testing and loss forecasting Experian helping organisations understand the market, economy and future changes in household and business finances. Contact our team on: T: +44 (0) 207 746 8244 or W: www.experian.co.uk/economics Contact Sunita Bali Principal UK Economist E: Sunita.Bali@uk.experian.com T: +44 (0)20 3042 4713 Sunita manages the suite of Economics Forecasting Products. She joined Experian in 2008 as a senior economist and in this role produced forecasts, scenarios and analysis on the UK economy and consumers. Prior to joining Experian, she worked as a Treasury Strategist at Rabobank and an International Economist with IHS Global Insight. where she held various roles related to modelling and forecasting global macro, industries and energy markets. Peter Gutmann Managing Consultant E: Peter.Gutmann@uk.experian.com T: +44 (0) 207 746 8250 Mohammed Chaudhri Managing Economist E:Mohammed.Chaudhri@uk.experian.com T: +44 (0) 207 746 8235 Mohammed joined Experian in April 2014 and leads in producing Experian s monthly UK macro forecast and the quarterly Consumer Credit Report. He is also the economist responsible for running economic stress scenarios. Before joining Experian Mohammed began his career as a faststream economist at Her Majesty s Treasury.