Mixed fortunes for UK economy during 2015


Britain's economy saw mixed fortunes in 2015 as growth stuttered amid warnings the UK is too reliant on consumer spending fuelled by ultra low inflation and rock-bottom borrowing costs.

Shock revisions to growth in the third and second quarters, which came just a day after worse-than-expected borrowing figures, meant the economy ended 2015 on a sour note.

Interest rates were also in sharp focus as the US Federal Reserve finally pulled the trigger on its first hike in nearly a decade, seeing monetary policy in Europe and American move in completely opposite directions.

The UK notched up its eleventh quarter in a row of gross domestic product (GDP) growthby the end of September, but output was modest and came against the backdrop of a slowing global economy.

December's revisions from the Office for National Statistics (ONS) meant growth stood at 0.4% in the three months to the end of September, down from the initial estimate of 0.5%.

Expansion was also revised down to 0.5% for the quarter to the end of June, from the initially robust 0.7% previously recorded.

The data meant that expansion overall has been muted for much of 2015, following a disappointing start to the year, when growth fell to a paltry 0.4% from 0.8% the previous quarter.

The second and third quarters failed to deliver on hopes for a pick-up as the manufacturing and construction sectors faltered.

But the dominant services sector has been surging ahead thanks to buoyant consumer spending, boosted by record low mortgage rates and as wages continue to outstrip inflation - with Britain even seeing its first bout of mild deflation since 1960.

The Bank of England sent out confusing messages over interest rates after Governor Mark Carney initially cautioned that the prospect of a rise would come into "sharper relief" at the turn of the year, only to signal in the Bank's last forecast of 2015 that the cost of borrowing was likely to remain on hold until the end of 2016.

America's first rise since the summer of 2006 has put fresh pressure on the Bank to follow suit, although Mr Carney has been quick to reassure that rates will only begin to rise from the historic low of 0.5% when UK economic conditions allow.

The weaker-than-previously thought performance from the UK economy in the second and third quarters means the Bank is unlikely to be in any rush to raise interest rates, particularly with inflation remaining close to zero.

Meanwhile, the European Central Bank announced more economy-boosting measures in early December, cutting overnight deposit rates from minus 0.2% to minus 0.3% and extended a 60 billion euro (£43 billion) stimulus programme by six months.

While end of year economic data came as a blow to Chancellor George Osborne, he was handed a welcome boost from the Office for Budget Responsibility (OBR) when the Autumn Statement revealed a £27 billion boost to the public finances.

The OBR also said the UK was expected to narrowly beat its borrowing goal this year and remain on target to move into surplus by 2020.

This confounded many experts, who had predicted the Chancellor would have to push back his target to get out of the red and into the black.

Public sector finance figures for November soon cast doubt on the OBR's predictions, when government borrowing increased by £1.3 billion year-on-year to a worse-than-expected £14.2 billion.

One economist warned this left Mr Osborne facing a "massive task" to hit the 2015/16 targets.

Growth predictions have also been cut for 2015 as a whole after the December revisions by the ONS, with most economists forecasting expansion to have slowed to around 2.2% from nearly 3% in 2014.

Forecasts for global growth have also been slashed due to the slowdown in emerging markets and China.

This gloomier international picture has weighed heavy on the manufacturing sector in the UK, leading experts at the British Chambers of Commerce (BCC) to lower their UK growth forecasts and warn the UK needs to rebalance away from debt-fuelled consumer spending.

John Longworth, director general of the BCC, said Britain needed to invest to help firms export to narrow the trade gap, while more also needed to be spent on infrastructure to reduce reliance on services and help boost manufacturing.

He said: ''We cannot rely so heavily on consumer spending to fuel our economy, especially when driven by increased borrowing.

''We have been down this path before, and know that it leaves individuals and businesses exposed when interest rates do eventually rise.

''The UK still needs to see a fundamental shift in its economic model if we are to remain relevant and prosperous in a changing world economy."

Economists believe the final quarter of 2015 will see growth edge back up, to 0.6%, in line with forecasts from the Bank of England.

While the economy still faces some challenges in terms of rebalancing and global woes, experts believe 2016 will be another bumper year for consumers.

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research (Cebr), said: "With inflation basically zero and set to remain very low in 2016 amidst subdued oil prices, rising earnings are translating into some pretty notable increases in living standards."

"Factor in tax cuts - the increases in personal allowances - and the boost to confidence brought on by rising house prices, and the outlook for consumers looks even more positive," he added.

The Cebr is forecasting household spending to grow by 3%, with inflation stripped out, in 2015 and 2016, supporting GDP growth of 2.3% and 2.1% respectively and offsetting weakness elsewhere in the economy.

"Not a bad performance when the global economy continues to wobble, though not the export and investment-led growth that many were hoping for," said Mr Corfe.