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 at Columbia Threadneedle.
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.
The GDP print for January in the UK pointed to growth of 0.2 per cent.
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."
Azad Zagana, senior European economist at Schroders is more sceptical regarding the outllok.
He says: "The OBR’s growth forecast appears somewhat optimistic, especially in the near-term. The latest Schroders forecast has the economy contracting by 0.2 per cent in 2024, before growing by 1 per cent in 2025. Consensus estimates are a little higher for this year, but also have growth at just 1.1 per cent next year. If we are correct, then Labour is likely to inherit an economy with stagnant demand, being served by the supply side of the economy struggling to cope with labour shortages and growing complexity in trading with Europe. Based on current plans, apart from priority areas such as healthcare and defence, most areas of government departments will face significant real-terms cuts to their budgets for the foreseeable future.
