UK set for solid economic growth barring political surprises

The February 18th version of Goldman Sachs’ Global Economics Weekly discusses the relative outperformance of the UK economy over the last year or so, and highlights the expectations of GS analysts Kevin Daly and colleagues that the UK economy will grow by at least 3% in both 2015 and 2016. Daly et al argue that the improvement in available credit that followed the BoE’s switch from quantitative easing to credit easing and ECB President’s Mario Draghi’s “whatever it takes” commitment in the second half of 2012 have driven the recent uptick in UK economic performance.

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UK economy expected to grow by 3% over the next two years

UK Economy

The Goldman Sachs team says they expect the UK economy to expand by 3.0% in both 2015 and 2016, which is well above the current analyst consensus growth target of 2.7% and 2.5%. They note their relative optimism is a result of their belief the ongoing recovery in the UK’s banking system and credit availability will support the improvement in economic activity. Daly and colleagues also say they anticipate that a gradual increase in nominal wage growth, together with the decrease in global energy prices, will lead to notable gains in household real income.

Political uncertainty is a significant risk

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Political uncertainties could, however, have a significant impact on the country’s economic trajectory. The UK is holding a general election on May 7th, with a result and it is a very close race according to pollsters. The GS analysts note that any outcome to the election “involves risk for UK assets and the economic outlook”. They highlight that a continuation of the Conservative-led government would likely be viewed as the most “market-friendly” outcome, but also increases the risk of an exit from the EU. A Labor-led government would probably lead higher taxes for businesses and individuals; and, of course, it could come about that no party (or coalition) will be able to form a stable government. All of these scenarios could impair economic activity and roil markets.

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Weakness in productivity another concern

Daly and colleagues also point out that “UK labor productivity has been exceptionally poor since the crisis and has remained disappointing even as growth has recovered.” The report notes that the analysts while anticipate productivity accelerating as greater credit provision allows for greater efficiency in allocating capital throughout the economy, “a key medium-term risk to our views is that trend productivity is permanently lower.”

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