United Kingdom - Economic forecast summary (June 2015)


Economic growth was strong in 2014 and is projected to continue at a solid pace in 2015 and 2016, boosted by domestic demand. The unemployment rate is projected to fall further towards 5%. As spare capacity wanes, inflation is expected to pick up towards the 2% inflation target. The current account deficit has widened to above 5% of GDP, notably as investment income has disappointed, but is projected to narrow gradually as the euro area continues to recover.

According to the March 2015 budget, bolder fiscal consolidation is planned by the authorities in 2016 and 2017, with the adjustment mainly on the spending side. It is important that adjustment measures that are yet to be defined be fair. The normalisation of interest rates is projected to start in early 2016 as spare capacity narrows and inflation pressures rise. Bank stress tests planned by the Bank of England for this year are welcome, but extending future exercises to shadow banks would provide more comprehensive information on financial stability risks.

Stronger investment is needed to revive labour productivity, wages and competitiveness, and to balance the housing market. This requires greater access to finance for businesses, relaxed land planning regulations, and improved infrastructure. The perceived quality of infrastructure is lower than in other G7 countries, and the investment ratio is low in international comparison. Infrastructure could be enhanced by strengthening long-term government strategy and planning in order to attract private investors, and by leveraging limited public resources with private investment.

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