Improved economic conditions in the Eurozone set to boost the UK economy

Kingly Brookes, May 5th, 2015

Strong growth in the Eurozone and low inflation will cause the UK’s economy to expand by 2.8% this year, a new report suggests. Research from the EY Item Club found that lower oil prices and low inflation has given a significant shot in the arm to employment figures, paving the way for the highest rise in disposable for more than two decades. The reduced projections for quarter four mean the figure is slightly lower than previous predictions of a 2.9%, but it is still impressive and puts the UK on course to meet growth forecasts of 3% during 2016. The figure is also greater than predictions of 2.5% and 2.7% made by the Independent Office of Budget Responsibility and the International Monetary Fund (IMF) respectively.

Recent months have seen inflation fall to zero, greatly boosting consumer confidence. However, another factor in the growth has come from the €1.1 trillion asset purchase stimulus implemented by the European Central Bank. Peter Spencer, the Item Club’s chief economic adviser, said the economy is not being impacted by the upcoming general election as “noflation trumps politics”, and that recovery in Europe is helping to complete the “UK growth picture”. He added that while “headwinds” held the economy back in the early years of the current coalition government, “tailwinds” will outweigh any political uncertainty after the 7th May this year.

In addition to overall economic growth, UK exports are set to increase by 5.9% this year and a further 4.9% during 2016. However, the report pointed out that there are factors which carry potential risks, including a weak post-election government, a possible EU referendum and concerns over Russia and Ukraine, although worries over the later have eased somewhat recently.

In terms of salaries, there is expected to be growth of 2.1% in 2015 and 2.4% next year. With prices only likely to rise by 0.1%, this translates into a 3.7% rise in disposable incomes – the biggest increase since the 1990s. The ratio between household income and debt is likely to remain stable, with the prospect of people binging on credit being very unlikely. This is backed up by a study published by the financial information and services company Markit this week, which stated that the squeeze on British families is at its lowest level since the height of the economic downturn in 2009.

Markit’s Household Finance Index rose from 45.5 to 45.8 in April and it appears that most people are using their additional income to pay down debts rather than increase their spending. A key reason for this is the fact that many are not confident that wages will continue to rise. Indeed, just one in five said they expect their salary to rise by more than 2% this year, and only one in ten are confident about receiving a wage increase of 3% or more. Those earning less than £15,000 per annum are anticipating the lowest pay rises with an average of 0.5% predicted. This is in contrast with people earning over £57,000 who are likely to enjoy an average increase of 1.6%.