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The UK economy is likely to be among the fastest growing economies in the world this year as inflation falls and real incomes rise, according to Steven Bell, chief economist.
Bell was commenting in the context of the latest GDP forecasts from the Office for Budget Responsibility which said GDP growth would hit 0.8 per cent this year and 1.9 per cent next year.
It also forecasted inflation would fall below 2 per cent this year.
Although both of those numbers represent significant increases relative to previous forecasts, Bell believed the numbers are too pessimistic, and that a “significant change in atmosphere is coming” with regards to how the UK is viewed both at home and abroad.
He said the 0.8 per cent number is one he forecast on a webinar last week.
He said: “The public will be surprised to hear inflation will be 2 per cent. This is because that is the headline rate, and the fall is mostly the result of the energy price cap falling from £2,500 to £1.500. Wage growth remains strong.”
Central to his view that economic sentiment could radically change were two factors.
The first was that if wage growth continues to be robust at the same time as the headline inflation rate declines, then the real value of people’s income would rise.
The second factor he thinks is important is that, very unusually for a period of high inflation, people’s savings rate (the proportion of their income they save each month) has increased.
This is not something which happened in the US, despite that economy having much stronger growth than in the UK.
Bell’s view is that in the UK people saved more of their income in anticipation of higher energy bills in future, but as they notice energy bills declining, they will have the confidence to spend more of their income, boosting economic growth.
A key consideration in all of this, according to Bell, is that the UK population has increased markedly in recent years, “so that while GDP is forecast to rise, GDP per capita [that is, per head of population] is forecast to contract”.
Bell added: “This means that every extra unit of economic growth is distributed among a larger number of people, so may not be felt in any significant way by the population, unless GDP growth per head of population also increases.”
Responding to the economic impact of the 2 percentage point cut in national insurance, Bell said this was likely to be stimulative for the economy, even when considered against the freezing of the tax bands.
He explained: “If you take a £1bn spend on cutting national insurance, even if there is a £1bn gain from freezing the tax thresholds, it still represents stimulus for the economy because national insurance is only paid by workers, whereas income tax is paid by others.
“The young are more likely to be workers, and the young are more likely to spend their extra income. But also, the OBR assume that a cut in national insurance will encourage more people back to work, and that is stimulative.”
Konstantinos Venetis, senior economist at Global Data TS Lombard, is much more sceptical.
He felt the tax cuts in the Budget will inevitably lead to lower government infrastructure spending “which will cap” the extent to which the UK economy can grow, and that the tax cuts announced will not make up the lost ground.
Hetal Metha, head of economic research at St James Place, is more cautious, saying that were the OBR growth numbers to be wrong, there would be little “headroom” for the chancellor to take further measures to stimulate growth.
Robert Alster, chief investment officer at Close Brothers Asset Management, said the measures announced in the Budget are likely to boost GDP growth very modestly.
He said: “Overall, spending is higher by around £13bn in 2024-25, fading to c.£5bn in the final year of the forecast.
“In year one, this is meaningful, and should be modestly supportive for GDP growth. The consequence of this is diminished headroom against the government’s fiscal rules – the OBR estimates that public sector net debt will only fall by -0.3 per cent of GDP in the final year, shrinking headroom by £4bn.
“That said, these numbers assume cuts to expenditure in the next parliament and with an election on the horizon, these spending cuts may not be the current chancellor’s concern. If that is the case, it will be up to the next government to evaluate these changes and consider the impact of them on their own plans.”
