Since mid-2013 the UK economy has grown at the fastest pace of any developed economy and for 2014 is set to record 3.0% growth, the strongest annual rate since 2003. Was this just booming consumption spending and rising housing wealth powering the economy, as of old, or was it more balanced growth that can be sustained in 2015?
The UK economy’s strong 3.1% p.a. growth over the past fifteen months was no typical consumer/debt fuelled boom but rather an investment led recovery. Business investment expanded at 10.2% p.a. while, in contrast, consumer spending advanced at just 2.3%. Housing, jumped 12.6% but from an extremely low base. As for household debt, outstanding mortgage lending increased by just 1.1%, credit card debt by 2.3% while total overdrafts and structured personal loans both fell.
While the strength of business spending has proven most welcome, sustaining GDP growth around 3% will become more difficult over the next few quarters. UK households don’t have the benefit, as in the US, of a 25% fall in petrol prices, indeed, they are only around 6% below the average for much of the past three years.
With housing activity also moderating, consumption needs the support of stronger wages growth if UK GDP is to stay within a 2.5-3.0% range in 2015. Fortunately, there are some tentative signs that wages are starting to turn and will contribute to stronger income growth and consumer spending.
Of course, there are numerous risks, the recent slowing in activity, for example, has been attributed partly to weakness in the euro area, which, if prolonged, the BOE Governor noted, could pose the main threat to growth in 2015. The UK will also have to contend with possible interest rate rises later this year, a general election and a new government and the destabilising possibility that an EU referendum may be on the agenda. Overall, a more difficult year awaits the UK.
