UK economy warming up

GROWTH is returning to the British economy twice as fast as official estimates suggest, a respected think tank has forecast this morning.

According to the latest projections from the National Institute of Economic and Social Research (Niesr) GDP will grow by 1.2 per cent this year, doubling the Office for Budget Responsibility’s March estimate for 0.6 per cent growth.

The group expects the UK’s recovery to pick up even more speed next year, anticipating that the economy will expand by as much as 1.8 per cent in 2014.

Just three months ago Niesr’s forecasts were hovering below one per cent growth for this year, and rising to only 1.5 per cent next year.

Despite the more positive outlook, the analysts warned that the economy is being heated up by an increase in consumer spending, as households’ focus moves away from saving even as real incomes continue to fall.

In the first quarter of the year, households in the UK saved just 4.2 per cent of their total income, the lowest proportion in four years.

Niesr also warned that any sustainable recovery of the economy would need help from other areas – like trade and investment – which have not yet materialised.

But the UK’s manufacturing industry did provide a boost to the UK’s hopes of recovery yesterday, with Markit’s purchasing managers’ index (PMI) for the sector hitting its highest level in over two years during July. The index has now climbed steadily upwards for five months in a row, the first time such growth has been sustained since 2010.

Employment in manufacturing also saw an upswing for every month in the second quarter, according to the hundreds of industrial firms surveyed by Markit.

“If services PMI continues to point to robust growth next week, as is likely, the third quarter’s GDP growth could easily come in as good as it did in the second, possibly better,” said David Tinsley, the chief UK economist of BNP Paribas.

Another survey, conducted by Nielsen, has also registered the highest confidence in job prospects since the first three months of 2008, before the onset of the recession.

But Nielsen’s UK managing director, Chris Morley raised concerns over how sustainable the uptick in consumer spending would prove.

“Financial issues are still dominating people’s concerns, and consumers will need to see stronger signposts that the economy is improving before they become less cautious”, he said.

Despite upping its forecasts for the UK, Niesr still expects unemployment and government borrowing to be stagnant for the near future. The public sector’s deficit will hover at around seven per cent of GDP, with unemployment stuck at around eight per cent through the rest of this year and well into 2014, according to its forecasts. The government’s debt as a proportion of the economy will not begin to decline until 2017.