Inflation is not likely to rise above 1% for the remainder of the year, with falling oil prices and prolonged low interest rates emblematic of a period of financial relief for Britain’s consumers, according to a new report.
The Ernst & Young Item Club (E&Y) conceded that whilst “not every economy will be a winner” from plummeting oil prices, the UK will prosper and the economic forecasters have pushed their GDP growth predictions for 2015 up from 2.4% to 2.9%.
Falling petrol and retail prices will be welcomed by Britain’s shoppers, who will most likely be stimulated into further buying following a booming Christmas period for high street shops.
Peter Spencer, chief economic adviser at the E&Y Item Club, said in the quarterly report: “Cheaper energy will have large and wide-ranging effects on the UK economy, giving the consumer a major shot in the arm and driving inflation as measured by the Consumer Prices Index (CPI) down to an average of zero this year.”
Additionally, with wages starting to rise in real terms, consumer confidence in the economy will heighten all the more. This factor, combined with people’s realisation that interest rates are not on the horizon just yet, will organically spark a greater number of housing transactions with increasing demand pushing housing prices up.
The E&Y Item Club also noted that the greater flexibility with which pensioners have been afforded in regards to accessing their defined contribution pension savings could lead to more being invested in the buy-to-let market.
All in all, the economic outlook for 2015 is looking largely rosy as far as the UK is concerned, yet there are certain risks which could prove damaging. Whilst transient factors all point to high levels of UK consumption for the foreseeable future, the economy remains dependent on this becoming an actuality, leaving it balanced somewhat precariously.
With businesses losing revenue due to falling prices, increasing levels of consumption are required to account for this deficit, or else workers could be laid off and wages frozen causing the UK’s economic recovery to stutter.
The E&Y Item Club also pointed to the political uncertainty resulting from the impending general election as a potential constraint on employer’s willingness to hire new workers, which could further slow the wider economic recovery.
Mark Gregory, Chief Economist for UK and Ireland at E&Y Item Club, said businesses might need to review their budgets in light of the current economic climate, calibrating them with favourable economic factors.
However, Mr Gregory also said: “On the risk side, it isn’t hard to see why companies need to remain vigilant. The brighter outlook continues to be overshadowed by several significant discontinuities and ‘what if’ scenarios – ranging from a Greek exit from the Eurozone to a UK election result that sees a Conservative-led coalition move quickly to an EU referendum. Such risks mean businesses should keep a very firm grip on their investment plans.”
With regards to Europe, recent data indicates that the EU is succumbing to deflationary pressure and there is a prevailing expectation that the ECB will initiate a sweeping quantitative easing programme, laced with a plethora of risks, this week in a move to keep interest rates low, stem the tide of falling prices and prevent the Eurozone from nose-diving into recession.