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Eurozone to boost UK economy growth

Published 20/04/2015

The eurozone recovery will help to boost growth in the UK economy, according to a report
The eurozone recovery will help to boost growth in the UK economy, according to a report

Ultra-low inflation and an upturn for the eurozone will help the UK enjoy solid growth of 2.8% this year despite jitters ahead of the election, according to a new report by the EY ITEM Club.

Chief economic adviser Peter Spencer said the economy was taking the impending vote "in its stride", with positive "tailwinds" likely to outweigh political uncertainty.

Inflation has fallen to zero in recent months and, added to the boost from more jobs, this is boosting consumer confidence with shoppers finding the money in their pockets will stretch further, the EY ITEM Club's spring forecast said.

It said an added bonus came from the eurozone recovery, reinforced by the European Central Bank's 1.1 trillion euro (£790 billion) asset purchase programme.

The report said the strengthening recovery in the region, which is the UK's biggest export market, should offset a hit to overseas trade from the strength of the pound.

The forecast pencils in growth of 2.8% for this year, a slight fall from the previous 2.9% projection after last year's fourth quarter growth came in weaker than expected. Next year is expected to see 3% expansion, up from 2.9%.

Mr Spencer said: "The economy is taking the General Election in its stride as 'noflation' trumps politics. The eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016.

"This is a mirror image of what we saw in 2010-12, when unemployment and inflation were high and Europe was in the doldrums.

"If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post 7 May should be strong enough to outweigh the effects of any political uncertainty."

Mr Spencer said consumers were "definitely in the driving seat" of the recovery, but there was "little prospect of a credit-fuelled binge, with the household debt to income ratio set to remain relatively stable".

Meanwhile, the report expects the eurozone recovery to boost trade - with exports to rise by 5.9% this year and 4.9% in 2016.

Mr Spencer added: "However, it's not all plain sailing and possible risks around a weak government and an EU referendum remain.

"In Europe, the Greek tragedy has yet to reach a denouement, although European banks and investors seem prepared for a disorderly outcome.

"But worries about Ukraine and Russia have eased and we are confident that the UK economy would not falter from any of these shocks."

Mark Gregory, EY's chief economist, said: "With less than a month now until the election, the economy and businesses seem to be powering through relatively unscathed.

"Despite a softer performance from business investment in recent months, we're likely to see the pace of spending by firms gather again later this year as companies hone their strategies to tap into buoyant consumer confidence."

The forecast suggests that with inflation likely to remain very low until the end of this year, interest rates are unlikely to be lifted from the current level of 0.5% until spring 2016, ending next year at 1.25%.

The prediction for growth of 2.8% is ahead of the International Monetary Fund's latest forecast of 2.7% and the independent Office for Budget Responsibility, which is predicting 2.5%.

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