At the end of 2014, we looked towards the year ahead and the risks which could have an impact on UK economic growth. Now that we are over half way through 2015, we thought it was a good time to revisit and update our thoughts. UK political uncertainty has gone, however the other highlighted risks noted remain largely the same.
In 2014, the UK economy grew 3%. Forecasted growth rates for 2015 and 2016 have faced cuts following a slowdown at the start of the year. Official figures indicated the UK’s growth rate halved in the opening months of 2015. In July, The OBR revised its 2015 GDP forecast downwards to 2.4% from the previous forecast of 2.5%. Other forecasters have made similar cuts. This year’s rate of growth is likely to be lower than 2014 but still a respectable 2.3-2.5%.
Here we revisit some of the domestic and global risks which could have a knock on impact on the UK growth outlook for the remainder of 2015.
Re-examining the risks
UK Political uncertainty gone
At the beginning of the year political uncertainty was significant due to the general election in May. Following the Conservatives claiming a (surprise) majority, this threat has diminished. There is now a single party in power and a vision set out for fostering growth and cutting the deficit over the next term of parliament. The prospect of a settled government is good news for business and investment. However the UK’s continued lacklustre productivity growth is still a risk, as are current low to none existent inflation (0% in June 2015) levels.
Eurozone Instability remains
The Eurozone has regained some momentum this year, thanks partly to the ECB’s quantitative easing programme, but overall economic growth remains patchy. Germany is going strong at one end of the spectrum, with Greece at the other end in a rather perilous position. Unemployment continues to remain high in several countries (e.g. 22% in Spain), especially among the young. Government debt burdens for many countries are also at uncomfortable levels, with debt to GDP ratios above 100%.
Greece stays in the tent for now
The most topical subject of the Eurozone over recent months has been focussed on the possible Grexit. Immediate concerns have eased after agreement was reached on short term financing but its long term future within the single currency is far from assured. The UK has less exposure to defaults than others, but there is the threat of contagion to other European nations should Greece leave the Euro, and this risks shaking the economic structure of the continent.
China’s slowdown continues
China’s economic growth is calculated to be slowing. This has global implications on consumption and commodity prices. China’s stock market has been plunging amidst high volatility which has seen significant interventionist measures by the government. It remains to be seen whether this represents a normal correction after a period of continual gains, or if it's a sign of deeper problems in the Chinese economy.
Russia adapting to the cold
The country has been left vulnerable by weaker oil prices (about half of what they were a year ago), which together with gas, accounts for about half of its budget revenue. Russia’s current recession and involvement in Ukraine continue to create uncertainty.
US expansion ongoing
The US growth story remains one of the main drivers for global sentiment amongst the major economies. Although slightly inconsistent, headline unemployment and consumer spending data has continued to head in the right direction. The timing of a possible interest rate rise has been the dominant theme of debate. The US Federal Reserve has indicated it is taking a more positive outlook, but still needs to see further evidence of recovery. The risk remains that growth may stumble, spooking the global financial markets.
Emerging markets under pressure
Emerging markets could be adversely affected by a US interest rate hike, which could dampen investor appetite for riskier assets in this sector. This could leave a number of these nations reliant on foreign debt investment vulnerable. If the dollar strengthens, concerns will grow about the ability of these nations to service debts issued in the US currency. A number of these countries are also dependent on commodity exports, the price of which is falling and putting them at risk. China accounts for almost half of global demand for industrial metals and its slowdown is having a knock on global impact.
While the UK shows signs of progress, risks remain and progress has been somewhat slow and inconsistent, with productivity a key domestic issue. The current global economic landscape, especially the Eurozone’s lack of reform and slowdown in China as key risks, suggests a UK growth rate in excess of 2% would be credible against a global headwind.