national institute of economic and social research niesr prospects for the uk economy simon kirby...

National Institute of Economic and Social Research

NIESR

Prospects for the UK Economy

Simon Kirby

National Institute Economic Review, November 2013, No. 226


The evolution of NIESR GDP growth forecasts

GDP forecasts broadly unchanged since August– 0.2pp upward revision in 2013,

2014 and 2015– Growth of 1.4% in 2013 and

2% in 2014, 1.9% in 2015 Compared to forecasts

published first half of this year; noticeable upward revision– ONS revisions to estimates of

previous quarters Upward revisions to consumer

spending forecasts Fiscal policy broadly

unchanged


Consumer spending is a necessary driver of recovery

Consumer spending growth of 2% in 2013 and 2.4% in 2014– House price increases in

2014 add about ½ pp to consumer spending growth

– Housing market activity still noticeably below pre-crisis levels

Net trade positive contribution to growth from 2016– In 2018 UK expected to

require foreign financing equivalent to 2.1% of GDP.


CPI inflation rate to remain above target throughout 2014

Upward revision to rate of inflation in the short term– 2.6%pa at the end of

2014

Incorporates the announced price rises of utility companies

Recent appreciation of sterling passes through to CPI


Unemployment rate is expected to gradually fall

Unemployment rate to pass through MPC’s intermediate threshold of 7% early 2016

Unemployment rate to reach 7.4% mid-2014– +/- 0.3pp 95% CI on LFS

estimates, due to sampling variability

– 1 in 5 chance rate will drop below 7% in 2014Q1


Markets have taken little notice of MPC’s forward guidance


Primary fiscal target met with room to spare

Five year forward horizon rolls on to 2018-19 CB moves into balance in 2017-18 and surplus in 2018-19

– Cyclically adjusted balance achieved with more than 50% chance of success Forecasts incorporate revenues from recent asset sales (approx £5bn) Asset sales continue to pose upside risk to the forecast


Summary

GDP growth in 2013: 1.4%, 2014: 2.0%, 2015: 1.9%, 2016: 2.1%

GDP to recover pre-recession peak in 2015Q1 Consumer spending main driver of growth this year and next

– Supported by housing market, but at the expense of household saving

CPI inflation rate to remain above target in 2014– 2.6% pa at the end of 2014

Real consumer wages to fall further in 2014 Financial markets have taken little notice of MPC’s forward

guidance– We assume first Bank Rate increase comes in the second half of 2015

Unemployment rate to drop below 7% at the start of 2016– 20% chance unemployment rate drops below 7% in 2014Q1

Primary target of the Fiscal Mandate to be hit with room to spare


Forecast summary table


Comparison with August 2013 forecast (August 2013 forecast in parentheses)

GDP growth: 2013: 1.4% (1.2%), 2014: 2.0% (1.8%), 2015: 1.9% (1.7%), 2016: 2.1% (1.9%)

CPI inflation rate: 2013: 2.6% (2.7%), 2014: 2.5% (2.3%), 2015: 1.9% (2.2%), 2016: 1.9% (1.9%)

Unemployment rate: 2013: 7.8% (8.0%), 2014: 7.4% (7.9%), 2015: 7.2% (7.6%), 2016: 6.8% (7.3%)

PSCB (% of GDP, excluding APF): 2013-14: -5.5% (-6.0%), 2015-16: -3.1% (-3.6%), 2016-17: -1.5% (-2.1%), 2017-18: -0.2% (-0.9%)

Primary target of Fiscal Mandate met: Yes (Yes) Secondary target of Fiscal Mandate met: No (No)


Quarterly GDP growth rates (per cent per quarter): August 2013 and November 2013 forecasts compared

Quarter Aug-13 Nov-132012Q1 0.0 0.02012Q2 -0.5 -0.52012Q3 0.7 0.62012Q4 -0.2 -0.32013Q1 0.3 0.42013Q2 0.6 0.72013Q3 0.6 0.82013Q4 0.5 0.52014Q1 0.4 0.42014Q2 0.4 0.42014Q3 0.4 0.42014Q4 0.4 0.52015Q1 0.4 0.52015Q2 0.5 0.52015Q3 0.5 0.52015Q4 0.5 0.52016Q1 0.5 0.52016Q2 0.5 0.52016Q3 0.5 0.52016Q4 0.5 0.5

Note: cells shaded grey identify the last ONS data point (preliminary estimate of GDP)


Quarterly unemployment rates (per cent of labour force): August 2013 and November 2013 forecasts compared

Quarter Aug-13 Nov-132012Q1 8.2 8.22012Q2 8.0 8.02012Q3 7.8 7.82012Q4 7.8 7.82013Q1 7.8 7.82013Q2 8.0 7.82013Q3 8.1 7.92013Q4 8.0 7.82014Q1 7.9 7.52014Q2 7.9 7.42014Q3 7.9 7.42014Q4 7.8 7.42015Q1 7.7 7.32015Q2 7.6 7.32015Q3 7.6 7.22015Q4 7.5 7.02016Q1 7.4 6.92016Q2 7.4 6.82016Q3 7.3 6.72016Q4 7.3 6.7

Note: cells shaded grey identify the last ONS data point


Quarterly CPI inflation rates (per cent per annum): August 2013 and November 2013 forecasts compared

Quarter Aug-13 Nov-132012Q1 3.5 3.52012Q2 2.8 2.82012Q3 2.4 2.42012Q4 2.6 2.62013Q1 2.8 2.82013Q2 2.7 2.72013Q3 2.8 2.72013Q4 2.5 2.32014Q1 2.1 2.32014Q2 2.5 2.72014Q3 2.3 2.52014Q4 2.2 2.62015Q1 2.2 2.02015Q2 2.3 2.02015Q3 2.2 2.12015Q4 1.9 1.72016Q1 1.9 1.82016Q2 1.9 1.82016Q3 2.0 1.92016Q4 2.0 1.9

Note: cells shaded grey identify the last ONS data point

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