Earlier this week the Centre for Economic and Business Research upgraded its forecast for growth in the UK economy, from 2.8% to 3.1%, for 2014, which would be the strongest rate of growth since the 3.4% seen in 2007, just before the crash.
The forecast is more optimistic than that of the Treasury’s official independent forecaster, the Office for Budget Responsibility, which said it expects growth of 2.7% in 2014.
Tax cuts before election?
The CEBR cited a rise in disposable incomes, business investment, the construction sector and a buoyant housing market as reasons for the predicted acceleration in economic recovery and suggested that this may give the Chancellor the opportunity to make in the region of £7bn in tax cuts before the general election, also highlighting that GDP growth, inflation at less than 2%, low interest rates, continuing falls in unemployment and rising house prices could create a potent feelgood factor.
It said growth should become more evenly spread and less concentrated in consumer spending – long cited as a concern hanging over the recovery – as business investment grows strongly, and the construction sector is supported by a robust pickup in house building. It believes that consumer spending will account for 46% of growth this year and expects business investment to grow by a robust 10.1% in real terms.
It report also predicted a much rosier outlook for households, with real disposable incomes expected to grow by 1.5% in 2014, following a fall of 0.6% in 2013.
Annual inflation, currently at 1.6%, is expected to remain below the Bank of England’s 2% target for the rest of the year, further easing the burden on consumers and reducing unemployment is also likely to support household finances.
Despite this improved outlook, the Bank of England has made it clear it is no rush to increase interest rates, keeping them at their current all-time low of 0.5%, where they’ve been since March 2009.