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UK Economy Keeps Momentum at 2014 Start: NIESR

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  • NIESR estimates the UK economy grew 0.8% in the quarter to January, up from a slight slowdown of 0.7% growth in December, and holding on to momentum gained in the third quarter of 2013. Still, the institute suggests the output gap will remain negative for longer with the BoE keeping rates on hold until Q2 2015.

 

Britain's gross domestic product (GDP) appears to have regained momentum at the start of the year after slightly losing steam towards the end of 2013.

 

GDP is now estimated to have grown at a slightly faster rate of 0.8% in the three months ending in January, up from 0.7% over the quarter to December, according to the monthly GDP survey published on Friday by the National Institute of Economic and Social Research (NIESR), Britain's longest established independent economic research institute.

 

In its release, NIESR also said it expects output to regain its pre-recession peak, recorded in January 2008, in less than nine months time. Even so, the institute also points to the fact that “a large negative output gap will remain” and therefore expects the Bank of England (BoE) to keep interest rates on hold until the second quarter of 2015.

 

The official statistics showed the UK economy grew 0.7% in the fourth quarter of 2013, down from 0.8% in the third quarter. The Office for National Statistics (ONS) said in its first estimate that the economy had still remained 1.3% below the peak in the first quarter of 2008.

 

NIESR publishes its quarterly GDP updates on a monthly basis and analyzes floating quarters as opposed to the official data provided by the ONS in London, which gathers figures on the basis of calendar quarters.

 

NIESR ups UK growth forecast driven by spending

 

NIESR also published its latest quarterly GDP forecast for the UK economy, in which it said the economy should rise at the rate of 2.5% this year, up from an estimate of 2% published in November. The economy is then expected to slow down in 2015 to an annual GDP rate of 2.1%.

 

In its forecast release, NIESR said the primary driver behind the GDP growth has been consumer spending despite real consumer wages falling. This may probably be offset by Consumer Price Index inflation falling sharply to the 2% target in December, easing households' budget squeeze slightly.

 

Looking ahead in more detail, NIESR expects “consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market.”

 

“House prices have seen a dramatic rise throughout the year, concentrated in London and the South East. There is considerable uncertainty over the magnitude of the impact of the second Help to Buy Scheme: stronger house price inflation would lead to even stronger consumer spending growth in 2014,” read the study.

 

Business investment to pick up, productivity to remain weak in 2014

 

NIESR also expects lower levels of uncertainty to support robust revival in business investment, while net trade is estimated to remain weak reflecting fragile markets in Europe.

 

However, the official data published today showed the negative trade balance improved at the end of 2013, although it may be viewed as non sustainable. An ONS analyst said on Friday that even though it is premature to numerically quantify the impact of a narrower deficit, it may positively contribute to the second revision of GDP in Q4.

 

The forecast also praised the strength of the UK labor market, but pointed to “stagnant productivity” which is expected to remain weak throughout 2014.

 

“In the short term, increased employment is welcome, but over the medium-term the absence of productivity growth would limit real consumer wage growth. Our forecast remains one of a gradual improvement in productivity, but continued stagnation poses a downside risk to the UK’s medium-term prospects,” reads the report on productivity.

 

On the BoE's (BoE) policies in light of a strengthened labor market, NIESR said “the surprisingly rapid fall in unemployment raises questions over the credibility of the BoE's forward guidance.”

 

“It remains unclear how this will be resolved. We have brought forward the point at which we expect interest rates to rise in the second quarter of 2015, although this is still more than a year after a breach of the unemployment threshold is expected,” NIESR added

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