NIESR lifts UK growth forecast but warns on low saving rates

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An influential think-tank has revised up its UK economic growth forecasts for 2013 and 2014 on the back of a better outlook for consumer spending.

The National Institute of Economic and Social Research now expects the UK’s GDP to expand by 1.2 per cent this year and by 1.8 per cent in 2014, a positive revision of 0.3 percentage points in both cases.

It believes the general outlook remains one of a gradual gain in economic momentum and that the main cause of the improved outlook is a rise in the prospects for consumer spending growth.

However its notes that this increased contribution from consumer spending is at the expense of household saving, rather than a consequence of rising real disposable incomes.

NIESR also expects that the unemployment rate will remain close to 8 per cent both this year and next and that consumer price inflation will remain above 2.5 per cent per annum this year but will fall back to 2.3 per cent, on average, next year. It also believes public sector net borrowing will be around £112bn, or 7 per cent of GDP, in 2013/14.

The latest figures from the Office for National Statistics indicated that GDP growth doubled to 0.6 per cent in the second quarter of 2013, up from the 0.3 per cent seen in the first. NIESR argues that these latest estimates suggest the 2008/9 recession was more severe than previously estimated, leaving GDP 1.3 per cent further away from its pre-recession peak.

The group however points out that the chief risk to its growth forecast is that low saving rates are not sustained. But while consumer spending growth is a necessary component of any recovery in the UK economy, a balanced recovery will require a significant contribution from net trade and gross fixed capital formation.

Presently NIESR says it sees relatively little sign of this as yet, with the current account deficit larger than in the decade before the onset of the Great Recession, and business investment volumes, remaining below 2007 levels until after 2017.

An unbalanced recovery driven primarily by consumer spending, especially if accompanied by rising house prices, is worrying from a long-term perspective, it says. NIESR forecasts that net national saving, having reached a low point of just 0.5 per cent of GDP in 2012, will only recover to about 2.5 per cent of GDP in 2017 – half that of the pre-crisis period.

In a statement the institute says: “The gradual gain in economic momentum is not enough to close the large negative output gap or reduce unemployment significantly. With unemployment high and no evidence of upward pressure on real wages there is still considerable spare capacity.

“Underemployment measures suggest that there is even more slack in the labour market than the headline unemployment rate suggests. In such an environment an acceleration in demand growth should be possible without stimulating inflationary pressures. As we have repeatedly argued, policy measures to boost investment, both public and private, would benefit the economy in both the short and long term.”

For his part, IHS Insight chief UK & European economist Howard Archer expects GDP expansion of 1.1 per cent in 2013, then improving to the same level as predicted by NIESR at 1.8 per cent in 2014 – supported primarily by moderating inflation, higher employment, easier credit conditions and healthier global growth.

He says: “Improved business confidence should support higher investment. Nevertheless, ongoing tight fiscal policy will limit the upside for growth as well as the extended need for consumer de-leveraging.”