UK: Upgraded 2014 Outlook

Our panel has lifted its 2014 GDP forecast after growth accelerated to a three-year high of 0.8% (q-o-q) in Q3 2013. Activity was once again boosted by the vibrant services sector which expanded by 0.7% (q-o-q), driving output to above its 2008 peak. Moreover, the services PMI jumped from 60.3 in September to 62.5 in October, stoking Q4 GDP expectations. Meanwhile, industrial production rebounded by 2.2% (y-o-y) in September, buoyed by strength in manufacturing. The UK construction sector was left debilitated in the aftermath of the financial crisis, but it has since regained momentum in recent months, and a revitalised property market helped construction output rise by 5.8% (y-o-y) in September. House prices surged in October as low interest rates and high consumer confidence bolstered demand. Observers have warned that policymakers must be prepared to intervene should the housing market begin to overheat, though some predict that recovering prices will induce greater consumer spending and spur GDP growth. Despite inflation eroding household purchasing power, retail sales advanced by 0.6% (m-o-m) in September, rounding off their strongest quarter for more than five years. The resurgent housing market, combined with falling unemployment, should support a consumer-driven recovery, although the road to rebalancing the economy towards exports is still a long one and government borrowing remains stubbornly high.

Inflation eased to 2.2% (y-o-y) in October, from 2.7% in September. The Bank of England left monetary policy unchanged on November 7 but signalled it may bring forward the possibility of interest rate hikes from late 2016, noting that unemployment could fall “faster than anticipated.”


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