UK economic recovery “increasingly domestic”

In its latest round-up of the UK economy, EY’s ITEM Club notes that the UK consumer continues to be the main driver of recovery – a buoyant labour market and rock-bottom inflation led to growth in real incomes of 4.5% in the year to the first quarter of 2015 and consumption has risen by 3.4%.

However, the wider slowdown in the world economy and the pound’s strength against the euro are holding back demand for the UK’s exports. So the recovery – while continuing – is increasingly domestic in nature.

According to the respected economic forecaster, the net result is a relatively positive economic backdrop, but also an increasingly unbalanced recovery that the Chancellor’s post-election Budget risks disrupting.

The report states: “While the Government’s spending squeeze is now slower than set out in the Spring Budget, the public sector cutbacks remain dramatic – and the introduction of £6.5bn of tax rises by 2020 will have the effect of reducing growth.

“Consumers will also be squeezed by the Summer Budget through a combination of tax rises, loss of welfare payments and reduced housing benefits, potentially offset to an extent by the ‘national living wage’, if employers pay it. And while the reduced tax on businesses’ profit and increased investment allowances should boost business investment, taxes and the costs of paying the living wage will act to mitigate their effects.

“Looking forward, EY ITEM Club expect UK GDP growth of 2.7% for 2015 and 2016, slowing to 2.4% in 2017. However, the uncertainties around the impacts of the Summer Budget – and not least over how businesses respond to its implicit call to boost investment, skills and exports – make forecasting especially difficult at the moment.”