The UK economy will take uncertainty created by the general election “in its stride” and grow 2.8 per cent this year, the EY ITEM Club says.
The consultancy’s spring forecast, which uses HM Treasury’s economic modeling, predicts gross domestic product will hit 2.8 per cent this year and 3 per cent in 2016.
This is significantly higher than the official Office for Budget Responsibility estimates laid out in this year’s Budget, which suggested GDP growth would be 2.5 per cent in 2015 and 2.3 per cent in 2016.
“While we accept the need for an official watchdog to be cautious, our forecasts are significantly more positive than the OBR Budget projections,” the EY ITEM Club report says.
“We see more room for expansion in the revenue-rich consumer and housing markets without undue pressure on household debt or house prices. We are much more optimistic in our prognosis for the eurozone.
“We also suspect that the prospects for long-term output growth are better than indicated by official projections. Our forecast would suggest that the prospects faced by a new government in May are not quite as dire as indicated by the OBR’s Budget arithmetic.”
EY ITEM Club chief economic adviser Peter Spencer says: “The economy is taking the general election in its stride as ‘noflation’ trumps politics. The eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016.
“This is a mirror image of what we saw in 2010-12, when unemployment and inflation were high and Europe was in the doldrums. If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post 7 May should be strong enough to outweigh the effects of any political uncertainty.”
CPI inflation will average 0.1 per cent this year, making any immediate rise in Bank of England base rate unlikely in 2015.
“CPI inflation will move back above 1 per cent this winter as base effects fall out of the calculation, paving the way for the first rate increase in the Spring of next year,” the report says.
Real incomes will rise 3.7 per cent this year, it says, driving consumption growth to 2.8 per cent.