Economic growth is projected to continue at a robust pace over the coming two years, driven by domestic demand. House prices have continued to rise, although housing supply is edging up. The unemployment rate has stabilised at around 5.5%, and recently wage growth has picked up. Projected increases in labour productivity should underpin real wage growth. The trade deficit has remained contained, but weak global trade and past currency appreciation are holding back exports. Inflation is expected to increase towards the 2% inflation target as pressures on capacity emerge.
This projection assumes the Bank of England will begin to raise its policy rate in early 2016, and then raise it gradually through 2017 to ward off excess demand pressures. The pace of fiscal consolidation has appropriately been smoothed to around 1% of GDP per year and now involves smaller reductions in spending on public services than earlier planned. However, the decision to significantly lift the minimum wage will increase labour costs, possibly lowering the contribution of employment to GDP growth.
The United Kingdom has made significant progress in its climate-change mitigation efforts. It has established a long-term framework with a unilateral commitment to reduce greenhouse gas emissions to 80% of their 1990 level by 2050, delivered through five-yearly reduction targets. To help reach this ambitious objective at low cost, carbon emissions could be taxed more uniformly by increasing the low implicit rates now faced by some sectors.