U.K. to Grow 1.1% on Consumer-Spending Growth

Britain’s economy will grow faster this year than previously forecast as consumers cut into savings to keep spending, according to the Ernst & Young Item Club.

The U.K. economy will expand 1.1 percent this year, compared with an April forecast of 0.6 percent, the London-based group said in a report to be published tomorrow. Growth will strengthen to 2.2 percent next year and 2.6 percent in 2015, both faster than previous estimates, it said.

Consumer spending will pick up as Britons save less, and a revival in housing and global growth will help support the recovery this year. New Bank of England Governor Mark Carney has also taken steps to help the economy, saying last week that interest rates will remain low for longer than investors anticipated.

“It’s looking much more positive,” said Peter Spencer, chief economic adviser to the Item Club. “Spending on the high street is holding up nicely, housing-market transactions are beginning to gather pace and, perhaps most significantly, the global economy also appears to be on the mend.”

Consumer spending will rise 1.6 percent this year as the savings ratio drops to 5.6 percent from 6.3 percent. Inflation will average 2.8 percent this year before slowing to 2.2 percent in 2014 and 2015, still above the central bank’s 2 percent target.

House Prices

In a separate report today, Rightmove Plc said home sellers raised asking prices for a seventh month to a record in July. Prices sought rose 0.3 percent to an average 253,658 pounds ($383,000), it said. Rightmove sees values climbing 4 percent this year, up from 2 percent previously.

Carney is due to announce next month how officials will use forward guidance when setting policy after the central bank gave a signal on rates on July 4. European Central Bank President Mario Draghi has also started providing forward guidance.

“There is a risk is that as in previous upturns the financial markets will anticipate tighter monetary policies and raise yields prematurely, delaying the expansion,” the Item Club report said. “However, this time central banks have new tools like forward guidance to help manage market expectations. The MPC and the ECB have already made it clear that the U.K. and European markets have got ahead of themselves and that they are in no hurry to raise policy rates.”

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