Every year based on information from economists and publications I make predictions on the economic outlook for the year.
According to Price Waterhouse Coopers (PWC) the UK Economy will remain the fastest growing major European economy in 2014. UK Gross Domestic Product (GDP) growth is expected to be in the range of 2 – 3% in 2014 with most likely growth forecast of 2.4%. The level of UK GDP is projected to rise back above pre-recession levels for the first time in the fourth quarter of 2014. Although there is an economic recovery, there is still a fear that the recovery is unbalanced and the UK economy could be derailed with problems in the Eurozone and future government austerity measures. The challenge for the UK Economy and government in 2014 is sustainability.
The budget deficit is the annual amount the government has to borrow to meet the shortfall between current receipts (tax) and government spending.
Public sector net debt (PSND) was £1,231.7 billion at the end of November 2013, equivalent to 76.6 % of GDP, up from 73.5% of GDP in 2013. The sharp growth in national debt started in 2008 because:
(i) 2008-13 recession (lower tax receipts, higher spending on unemployment benefits) The recession particularly hit stamp duty (falling house prices) income tax and lower corporation tax.
(ii) These cyclical factors have also exposed an underlying structural deficit. (deficit caused by spending greater than tax, ignoring cyclical factors)
(iii) Financial bailout of Northern Rock, RBS, Lloyds and other banks.
The Office for Budget Responsibility (OBR) forecast that PSND will peak at 80.0 per cent of GDP in 2015-16, and then to fall more rapidly to 75.9 per cent of GDP by 2018 – 19.
According to PWC the deficit (excluding special factors) is expected to fall below £100 billion in 2014/15 for the first time since the recession. This is all helps the UK economy retain its position as a financial powerhouse with the ability to attract investors worldwide in UK Bonds and Gilts.
According to the Office for National Statistics comparing August to October 2013 with the previous year the number of people in employment increased by 250,000 (to reach 30.09 million), the number of unemployed people fell by 99,000 (to reach 2.39 million) and the number of people not in the labour force aged from 16 to 64 fell by 45,000 (to reach 8.92 million). The Chartered Institute of Personnel and Development forecast for 2014 that employment will continue to rise by as much as 500,000 pushing unemployment below the Bank of England 7% rate by the end of 2014. Hence the Bank of England are unlikely to raise interest rates until 2015.
Last year there were fears that inflation would rise beyond the Bank of England’s target rate of 2%. How further from the truth that was because in December lower food prices helped inflation fall back to the Bank of England’s target rate of 2% for the first time in over four years. According to PWC inflation will remain slightly above target at 2.3% on average in 2014.
Although with inflation being as low as 2% you may expect the Bank of England increase interest rates, such an expectation is more common if inflation is above 2% in order to reduce inflationary pressures. So why have interest rates been as low as 0.50% since 2009? This is because the Bank of England are worried about the depth of the recession. They have argued that the increase in inflation (e.g. during 2011) was due to temporary cost push factors, such as taxes, commodity prices and effects of devaluation. Therefore, they tolerated inflation above target rather than risk a deeper recession. The UK is certainly on the road to recovery, but it will be a bumpy road and to increase interest rates this year when unemployment is still above 7% of the UK population would make that road to recovery more challenging with the danger of stagnating growth. As a result forecasters predict that interest rates will stay as low as 0.50% for the next 18 months.
Value of Sterling
Pound Sterling forecasters for 2014 are predicting the Pound could be one of the best performing currencies. In contrast the Euro is once again on the back foot, growth has stagnated, unemployment levels high and the European Central Bank has suggested implementing a negative interest rate. These factors will continue to push the Pound higher against the Euro. The Pound to Dollar is being driven by different forces. If North America reduce their quantitative easing programme we could see the Dollar’s value rebound and send the Pound to Dollar exchange rate back below the 1.600 GBP/USD level in the near term, maybe even below the 1.4200 GBP/USD long term by the end of 2014.
Halifax the biggest mortgage lender claims there are no signs a house bubble exists despite house price increases of 7% in 2013. Halifax predict prices would continue to rise during 2014 at a broadly similar pace to 2013 between 4% and 8%. It said rather than London and the South East surging ahead of the rest of the UK, all regions will experience house price growth, dismissing claims of a bubble. Halifax explain that house prices remained 12% below their August 2007 peak and transactions for 2013 were still around a 1/3 below the average for 2006 and 2007.
Carlo Pegna LL.B (Hons), FCILEX, MICM
If you wish to discuss any of the above or how I can help your business sustain cash flow on a bumpy road to recovery please do not hesitate to contact me on 01920 481467.