WIREDGOV

Prospects for the UK economy

• The economy will grow by 2.4 per cent this year and 2.3 per cent in 2016.

• Unemployment rate to remain at 5¼ per cent throughout the rest of this year and next year.

• The rate of consumer price inflation rises from close to zero per cent in 2015 to 1.1 per cent in 2016.

• The Bank of England to raise interest rates at the start of 2016 and then gradually increase by 50 basis points a year, reaching 2 per cent by the end of 2018.

The economy grew by 0.5 per cent in the third quarter of 2015. This softening in growth is temporary, with a rebound expected in the final quarter of this year. The economy will expand by 2.4 per cent this year and by 2.3 per cent in 2016. Domestic demand will continue to be the main driver of growth this year and next as households take advantage of purchasing power improvements from the low inflationary environment and firms continue to invest. Over the medium term, growth is expected to become more balanced as improving economic conditions in Europe lead net trade to offset a moderation in domestic demand growth.

Consumer price inflation remains subdued as external temporary factors currently weigh on prices. Inflation will average 1.1 per cent per annum in 2016 as the effects of these temporary external factors dissipate. From the middle of 2017 onwards inflation will be close to the Bank of England’s target of 2 per cent.

The first interest rate rise will probably occur in the first quarter of 2016, although we do perceive an increased probability that the Monetary Policy Committee will delay until the second quarter. After the initial rise, Bank Rate will increase gradually, by around 50 basis points a year, reaching 2 per cent by the end of 2018.

Unemployment will remain at around 5¼ per cent through the remainder of this year and in 2016. Total employment is expected to increase by 1.9 per cent in 2015 before decelerating to 0.8 per cent next year. A tightening labour market has supported a pick-up in nominal wage growth. The resumption of real consumer wage growth has been supported by the temporary absence of consumer price inflation. Sustained real consumer wage growth depends on future productivity growth and there have been signs of improvements in productivity growth recently. The resumption of poor productivity performance remains the largest domestic downside risk to our forecast.

Our outlook for fiscal policy remains broadly unchanged. Public sector net borrowing is expected to continue to fall to £54 billion (2.4 per cent of GDP) in 2016–17 from £80 billion (4.2 per cent of GDP) in this fiscal year. The government is expected to meet its new Fiscal Mandate and achieve an absolute surplus in 2018–19.

Notes:

The forecast for the world economy is published in the National Institute Economic Review no. 234 November 2015. Details of NIESR’s previous global economic forecast can be found here.

For a full copy of the global economic forecast or to arrange interviews, please contact the NIESR Press Office: Jane Padgham on 020 7654 1923 / j.padgham@niesr.ac.uk  

To discuss the forecast or for interviews, please contact:

• Simon Kirby on / s.kirby@niesr.ac.uk  or

• Jack Meaning on / j.meaning@niesr.ac.uk or

• James Warren on / j.warren@niesr.ac.uk

The National Institute Economic Review is the quarterly journal of the National Institute of Economic and Social Research (NIESR). Published in February, May, August and November, it is available from Sage Publications Ltd (http://ner.sagepub.com./) atsubscription@sagepub.co.uk.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contacting enquiries@niesr.ac.uk Switchboard Telephone Number: +44 (0) 207 222 7665.