CHEAP oil is set to help fuel a rebound in the UK economy after a sluggish start to the year, a think tank has said today.
The economy should grow by 2.5 per cent this year, according to the National Institute of Economic and Affairs (NIESR).
It comes after growth in the first three months of the year slowed to 0.3 per cent, which if maintained over the year, would translate to just over 1.2 per cent growth.
NIESR is also forecasting a slight fall in inflation into negative territory. This forecast is again based on subdued oil prices, but also on the lagged effects of the strength of the pound, which has made imports cheaper. The last reading for inflation was for March, when it came in at zero per cent.
Despite a possible slide into negative inflation, NIESR expects the Bank of England to hike interest rates in the first three months of 2016. Meanwhile, unemployment is forecast to continue its sharp fall and level off at about 5.25 per cent at the end of this year. It currently stands at 5.7 per cent, according to the Office for National Statistics.
Exports should also provide a boost to growth, despite diverging monetary policies pushing up sterling against the euro – the Eurozone is the UK’s biggest export market.
However, the think tank warned that the UK economy was not out of the woods yet.
NIESR said: “Future productivity growth remains the largest single uncertainty facing the UK economy, and hence the largest single domestic risk, both to the upside and the downside. Faster-than-expected productivity growth would boost output, raise living standards and ease fiscal pressures; even slower-than-forecast productivity performance would make matters considerably worse.”