Capital Economics hikes UK growth forecast to over one per cent this year

Capital Economics has nudged up its GDP forecasts for this year from 0.8 to 1.2 per cent this year as business surveys, retail sales figures, news on the housing market and consumer confidence indicate growing momentum in the second half.

Growth next year is expected to accelerate, with Capital Economics now forecast growth of 2.0 per cent (up from a previous estimate of 1.5 per cent).

Vicky Redwood, chief UK economist, Capital Economics:

Admittedly, there is still a big question mark over how sustainable this growth is. The recovery looks in large part consumer-driven – and with real pay still falling, that means it is being financed by rising borrowing and falling saving. And the recovery still faces some significant obstacles, not least flat bank lending and the ongoing fiscal squeeze. Indeed, the data may well weaken a touch in the near-term.

We should not get too carried away by this. After all, an expansion of 2% in 2014 would still mark the seventh consecutive year of below-average growth.

With stronger GDP growth likely to be driven by a pick-up in productivity growth, employment growth will remain weak. Accordingly, we think that it will take even longer than the MPC expects for the unemployment rate to fall below its 7% threshold. So despite the improving growth outlook, we think that markets are wrong to expect the first rate rise in spring 2015. We think that interest rates are likely to stay at 0.5% until 2017 or even longer.