UK economy will slow down in 2015

By on January 27th, 2015


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As 2015 gets under way, the next 12 months could prove tricky for the UK, what with a looming general election and a cooling housing market

For much of 2014, the UK stood out as an island of rapid economic growth in a sea of stagnation. As 2015 gets under way, it looks increasingly as though the UK is succumbing to the slowdown that has settled over much of the world economy aside from the US. Recent data on the health of the UK’s construction, manufacturing and dominant services sectors tells the same story: growth is slowing.

It could be worse. The UK is still likely to grow faster than most other parts of the world this year but, as the poet John Donne observed, no man is an island – and sadly for the UK, no island is an island either: the problems afflicting the eurozone and many emerging markets will not leave Britain entirely untouched; the struggling economies of the eurozone represent Britain’s biggest export market and a significantly weaker euro will force British exporters to hold prices down or risk losing business.

Other factors also point towards a tricky 12 months. With a general election in May and huge uncertainty about the outcome, companies are likely to move cautiously on new investments until they know who is going to be running the country and what changes they can expect – particularly as regards the possibility of a referendum on EU membership.

The election is also likely to signal the start of a further phase of austerity that will shrink the public sector further and put a temporary brake on the economy. Part of the reason that the UK has performed fairly well over the past year or so is that the austerity of the early years of this Government was relaxed in the second half of the parliament. Expect that cycle to turn once the election is behind us.

It is also clear that one of the main factors bolstering consumer spending – the housing market – is cooling again as valuations become stretched. This also points to a less buoyant year ahead. Lower oil prices will provide some support for consumer spending, but they will do nothing to help the Government’s already disappointing tax revenues, further reinforcing the need for more austerity to bring the deficit under control.

The good news is that against this background, interest rate rises are looking increasingly unlikely. The bad news is that wages are still barely outpacing inflation – even at its current weak levels – and the UK’s savings rate is heading back towards historic lows. The good news story is in need of a new chapter.


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