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Power to spend set to rise 1.5%

(London) Consumer spending power is set to rise by 1.5% this year, according to analysis by an economic think tank. The optimistic outlook was forecast by the Centre for Economics and Business Research (Cebr), which also said it expected the UK economy to grow by 3.1% in 2014 and 2.2% in 2015 – up from previous forecasts of 2.8% and 2% respectively.

Households are likely to see their living standards improving as earnings growth accelerates and headline inflation remains below 2% for the remainder of the year.

Declining unemployment is also likely to support household finances and overall, Cebr expects real household disposable incomes to grow by 1.5% this year after declining by 0.6% in 2013.

The think tank also said it expected b usiness investment to grow by 10.1% in real terms this year amid high confidence in economic prospects but s ignificant weakness in the current account, and Government spending cuts will weigh on growth prospects beyond 2015.

Its latest projections warned that economic growth is likely to peak this year and fall back in 2015 and 2016 as some of the factors driving economic expansion at present – such as reduced saving and a return to typical levels of consumer confidence – wear off.

While household consumption accounted for 81% of the economic growth seen in 2013, this is expected to decline to 46% this year as the economic recovery becomes more balanced.

The forecaster also said it expects a record-high current account deficit of £79 billion this year and that d eep Government spending cuts will also need to be implemented beyond 2015 if Chancellor George Osborne is to “even come close” to meeting his deficit reduction targets beyond this fiscal year.

It added that real Government spending this year is expected to stand 1.8% higher than in 2010.

Scott Corfe, managing economist at Cebr and the main author of the report, said: “The UK’s economic position has improved significantly since the start of 2013 and we expect solid growth of over 3% this year.

“However, challenges remain and economic growth is likely to fall back after 2014. There will be difficult Government spending cuts to be made in the next parliament and the parlous state of the UK’s trade position could become a significant economic issue going forward.”

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