Knowledge & Insight

The UK Economy - an end of term report

Fri 5 December 2014

The green shoots of recovery first seen in early 2013 have continued to grow. But will they burst into full bloom, or will they wither and die under the frost of global instability?

The UK economy has exhibited strong growth in 2014, surpassing many people’s expectations and putting our European partners firmly in the shade. But there are many factors that threaten our fragile recovery, including weak conditions in Southern Europe, faltering performance in China and India, ongoing conflicts in the Middle East, plus cooling relations between the West and Russia.

Yet the UK has a rather unique ability to achieve growth in challenging times by strengthening trading partnerships with nations that are performing well, either in the Americas, Europe or the Far East. And this “global interconnectedness” has long played a key role in the growth of both our manufacturing and service sectors.

What’s in store for 2015?

In their recent UK Economic Outlook update, PwC forecast UK GDP to grow at around 2.5% in 2015, slightly down on their final 2014 prediction of 3%. This is broadly in line with OBR forecasts and should certainly be viewed in a positive light given the persistent woes suffered across the Eurozone. Yet the story differs markedly across the UK’s regions, with growth in London forecast to reach 3.1% versus a meagre 2.0% in the North East and just 1.9% in Northern Ireland.

The search for balanced growth

PwC clearly state that the UK economy might be better served by growth that is more balanced across the regions. This is a concern that’s clearly shared by Government, as the Autumn Statement contained a number of potent measures designed to reinvigorate the UK’s northern industrial powerhouses. In today’s post-industrial economy, it’s not just output from automotive manufacturers, aerospace and pharmaceutical companies that drive the Northern regions. The cities of Manchester, Liverpool, Leeds and Sheffield now boast diverse economies, acting as international hubs in the creative and technology sectors, and hosting efficient and productive service centres for the country’s energy and utilities providers.

The importance of consumer confidence

We’ve seen how the UK can thrive in challenging global conditions, but ultimately, our recovery is both limited by and measured by consumer spending. Consumer spending has grown steadily over the past two years, yet in the long term, disposable income is likely to come under further pressure from rising housing and utilities costs together with low real wage increases and further cuts to the benefits budget. PwC suggest that real household disposable income growth could remain at around 1.5% per annum for the remainder of the decade, down significantly from an historic average of 2.5%.

Conclusions

Overall, despite some significant challenges, the outlook remains broadly positive, with the UK well placed to meet the challenges of the next 5 years. Our economy is underpinned by innovative manufacturers, an efficient and highly competitive service sector, plus strong trading relationships with partners around the globe. And whilst a revival of the UK’s northern cities would be good for all, London looks set to remain a global powerhouse. In fact, the regions can learn a great deal from London’s success - how sustainable growth flourishes when supported by good transport infrastructure, a diverse local skills base, and the devolution of local powers to local government. Apply these lessons, and all our regions can follow in London’s footsteps and play their own role in the UK’s ongoing recovery.

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