UK economy to grow by 2.5 percent this year, predicts NIESR

The rebound in GDP growth in the second quarter of 2015 confirms the weakness at the start of the year was merely temporary, the National Institute of Economic and Social Research (NIESR) has forecasted this week.

Growth in the second half of this year should be at a reasonable pace, primarily driven by consumption and business investment. GDP growth will average 2½ percent per annum this year and remain close to this level throughout the forecast.

A statement from NIESR said:

“A key determinant of our forecast is the return of meaningful productivity growth. This alone constitutes the largest domestic risk to the UK economy. In its absence, significant improvements in standards of living should not be expected.”

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The unemployment rate increased slightly in the three months to May 2015. This is only temporary. The increase will be reversed in the coming quarters as the unemployment rate gradually declines to its long-run level of 5-5½ percent.

The rate of inflation will continue to hover around zero throughout the remainder of this year. Both the absence of a rebound in oil prices and the appreciation of sterling against a basket of currencies weigh on the forecast for consumer price growth in the near term. These factors are likely to be temporary and by 2017 we expect inflation to be more consistent with the Bank of England’s mandated target of two percent per annum.

Despite weak price growth NIESR believes that the Bank of England will start tightening monetary policy in the first quarter of 2016. Bank Rate is then expected to rise gradually at around 50 basis points a year, reaching two percent per annum by 2019.

The Summer Budget signified a looser fiscal stance, which together with welfare cuts and tax increases has allowed the government to ease back on implied reductions on government consumption. NIESR expects an absolute budget surplus will be achieved in 2019-20, while net debt, as a per cent of GDP, will continue to decrease throughout the forecast period from its 2014-15 peak.