Britain’s economy will grow faster than previously forecast this year and next as consumers increase spending, according to the National Institute of Economic and Social Research.
Gross domestic product will expand 1.2 percent this year and 1.8 percent in 2014, compared with forecasts in May of 0.9 percent and 1.5 percent respectively, the institute said in a report in London today.
“The strength of the growth appears to be due to a further robust expansion of consumer spending,” Niesr economist Simon Kirby said in the report. “Such revisions do not change the general outlook for U.K. economic growth: one of a gradual gain in economic momentum, but not to the degree that is consistent with economic recovery.”
With the British economy strengthening and the euro-area showing signs of a pickup, the Bank of England left its stimulus program on hold yesterday. BOE officials are now focusing on how to provide guidance on policy to investors to help cement a recovery that isn’t yet assured.
Rising house prices and increasing consumer confidence aided the U.K. economy’s expansion of 0.6 percent in the second quarter. Unemployment claims fell at the fastest pace in three years in June and a manufacturing index released yesterday rose to a 28-month high in July.
With that backdrop of an improving outlook, the central bank’s Monetary Policy Committee left the size of its bond-buying program at 375 billion pounds ($571 billion) and its key interest rate at 0.5 percent, a record low.
The MPC will raise borrowing costs for the first time since the financial crisis struck in the second half of 2015, and “rates will rise only gradually,” Kirby said.
“Forward guidance is a useful additional policy tool for the MPC to use,” Kirby said. “However, if implemented, it will do little to improve credit conditions.”
He added that Chancellor of the Exchequer George Osborne also has scope to boost the economic recovery by relaxing his fiscal squeeze.
With faster-than-expected economic growth this year and next fueled by consumer spending, the institute said it had “modestly” revised down its GDP forecasts beyond that horizon as it expected Britons to save more.
“An unbalanced recovery driven primarily by consumer spending -- especially if accompanied by rising house prices -- is worrying from a long-term perspective,” Niesr said in a separate statement. “A balanced recovery will require a significant contribution from net trade and gross fixed capital formation.”
The forecast revisions leave the prediction for overall GDP expansion from 2013 to 2017 “broadly the same” as before, Niesr said.
Growth will not be enough to erase the “large” amount of slack in the economy or reduce unemployment “significantly,” the institute said. It expects the unemployment rate to increase to more than 8 percent “in the near term” from 7.8 percent in the three months through May, before falling to an average of 7.25 percent in 2017.
If policy makers tie any guidance on future policy to economic data, they are most likely to choose the jobless rate, Kirby said.
“If this unemployment rate threshold is no more than 7 percent, and the MPC expect the labor market to evolve broadly as we currently project, then interest rates should not be expected to rise for a number of years beyond 2015,” he said. “The concern must be that the MPC misdiagnose the magnitude of the equilibrium unemployment rate in the economy. If it is higher than they estimate, then monetary policy would be kept far too loose for too long and vice versa.”
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