Forecasters: UK economic recovery running out of steam

Jan 27, 2015

The UK’s economic recovery lost steam at the close of 2014, official figures are expected to confirm this week.

Growth is forecast to have slowed to 0.6% in the fourth quarter, from 0.7% in the third, according to a poll of economists by Reuters.

However, Chancellor George Osborne will be able to claim credit for the strongest annual performance since the financial crisis if the latest quarterly GDP data comes in as expected on Tuesday. If predictions of a 0.6% rise are correct, it would mean the economy expanded 2.6% for the year as a whole, the best performance since 2007 and faster growth than other advanced economies.

Months before the general election on 7 May, Osborne will likely seize on the annual figures as proof his “economic plan is working”. But there are already warnings that the UK is becoming over-reliant on debt-fuelled consumer spending.

The coalition took office more than four years ago with a vow to rebalance the UK economy towards exports and manufacturing and away from its dependence on domestic spending. But the first official glimpse on Tuesday of how the economy performed over the final quarter is likely to show the services sector as the main engine of growth.

“GDP growth should have remained strong ... but may have been less broad based,” predicts Samuel Tombs at the thinktank Capital Economics. “The output breakdown may show that the recovery has become entirely dependent on the services sector.”

Recent reports have pointed to a slowdown at the end of 2014 for both industry and construction while consumer spending appears to have held up. The latest figures from the high street last week showed sales rose in December as motorists rushed to fill up cars with cheaper petrol and food shopping was strong ahead of Christmas.

Analysts see little chance of that pattern changing in coming months as continued troubles among the UK’s key trading partner, the eurozone, and a slowdown in China weigh on exports. But manufacturing should get some support from lower oil prices.

Meanwhile, household spending is expected to remain the key driver for the UK economy as households get some relief from low inflation, rising employment and signs of the long-awaited return of wage growth. That boost to household finances is cited in a survey published on Monday as driving a spike in spending on non-essentials. A poll by consultants Deloitte puts discretionary spending at a three-year high. Fewer people suffered a drop in income, and more said they had received a pay rise or bonus than a year ago, according to the report. People also had more to spend on treats and big ticket items because essentials such as food and petrol continued to fall in price.

“Categories such as hotels and restaurants or consumer technology have really benefited from consumers feeling less of a squeeze on their disposable income,” said Ben Perkins, Deloitte’s head of consumer business research.

“In comparison, net spending on utilities and groceries is growing more slowly than consumer spending overall, a reflection of falling fuel prices at the pump and the grocery sector’s intense price competitions.”

However, the report also found that people continued to worry about job security.

Source: Guardian News