The UK economy got back on track in 2015q2 with growth at 0.7% q-on-q. Expansion remains driven by consumer spending as export-reliant industries continue to struggle against the backdrop of a strong pound coupled with sluggish demand from the EU.
But despite the unbalanced nature of the upturn, prospects are encouraging. Consumer incomes and spending for the rest of this year remain propitious– with inflation set to remain subdued, wage growth accelerating and underlying labour market conditions still robust.
We expect the UK economy to grow by 2.6% this year and 2.2% in 2016, with an upside risk that a eurozone recovery will boost exports, allowing growth to exceed this pace.
While it is early to speculate about prospects for 2015q3, we believe that with the service sector regaining momentum in the last few months, a solid outcome is likely. Recent survey results are mixed but on the whole encouraging.
The Markit/CIPS Purchasing Managers’ index showed a slightly better-than-expected reading for the manufacturing sector as an increase in domestic orders offset continuing weakness in overseas demand. The construction sector index slipped back in July after hitting a four-month peak of 58.1 in June but activity is at a high level, and while service sector activity also slipped a little in July the sector continues to thrive.
With the first rise in interest rates expected to be in late 2015 or early 2016, a significant impact on exposed households and on consumer demand will not be felt until 2017 or even 2018. The eurozone’s problems still cast a cloud over future performance. The defusing of the Greek crisis has eased risks in the near term, but the problem is fundamentally unresolved posing a downside risk to medium-term European and UK growth prospects.