Ten Predictions for 2014
We begin the year with our ten predictions for the economy in 2014. The professor and his team have dusted off the glass bowl and outlined the benchmark numbers by which we will judge the performance of the UK economy in the year ahead. Slideshare link.
Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The UK cannot grow faster than major trading partners in Europe without a deterioration in the inherent structural trade deficit. Forget rebalancing and the new normal, growth will return to trend rate, pushed by the household and consumer recovery with some contribution from investment later in the year.
Working with the GM Chamber of Commerce as their Chief Economist provides huge insights into the business sector. We use the influential quarterly economics survey to develop powerful coincident economic indicators for growth, inflation and employment. Significant indicators of trends in the Greater Manchester, North West and national economies as a whole. Our models of the economy are improving year on year with empirical adaptation as a result.
We expect GDP growth in 2013 to be revised up to 2% for the year following a robust performance in the final quarter of the year. The influential NIESR GDP tracker suggests growth was up by 2.9% in the final quarter of the year. Our own GM Chamber of Commerce co-incident indicator confirms the strong growth pattern. Following revisions to GDP released at the end of December, the economy grew by 2% in the second and third quarters. We expect the preliminary estimate, later this month, for 2013 as a whole, to be around 1.8% or 1.9% with a final revision to 2% by the end of the quarter.
Last week, the ONS released the manufacturing figures for November. Manufacturing slowdown hits recovery - the headline in today’s Times. Hardly! Growth year on year was up by 2.8% following a 2.5% growth in October. We expect the rally in manufacturing to continue into this year.
In 2014, the strong growth in service sector activity will continue with support from manufacturing and construction. We expect overall GDP growth of 2.5% in 2014 possibly rising to 2.7% in the following year.
Inflation CPI basis, fell to 2.1% in November. We are forecasting CPI inflation of around 2.3% in the year ahead. Service sector inflation remains a challenge to the 2% target averaging over 2.5% in the final quarter of 2013. International commodity prices, including oil, should be less of a threat to the UK inflation outlook and some improvement in sterling exchange rates will assist. The oil price outlook appears benign with US shale oil and a lower Chinese propensity to import, moderating Brent crude prices around $110 dollars per barrel for the year as a whole.
Unemployment and base rates
Growing employment will push the claimant count down to around 3.8% this year and 3.3% next year. The wider LFS indicator will fall to the 7% level by the middle of 2015. Then and only then will the forward guidance from the MPC come under review. We expect base rates to be kept on hold until the middle of 2015, thereafter rising in line with US base rates. Gilt yields on the other hand, we expect to be trading at fair value 4.5% by the end of the forecast outlook.
Stronger growth and a lower claimant count will lead to an acceleration in earnings and household incomes as a whole. The “new normal” may well appear to be the “same old same old” recovery consumer led recovery by the end of the year.
We expect significant improvements in the borrowing figures for this fiscal year and in the years ahead. Revenues in the eight months to November were up by 7% with spending up by less than 2% over the same period. We expect borrowing for this year to be around £105 billion falling to less than £90 billion in 2014/15. Still much to do but growth will restore equilibrium over the next four years assuming spending plans remain under control.
Last week the ONS released the trade figures for November. Nothing changes in the outlook. Our forecast deficit trade in goods remains around £110 billion this year rising to £117 billion in 2014. The service sector surplus will offset (in part) the trade in goods deficit. The bad news, - there will be no “net gain to trade” in the years ahead. The good news, there will be no balance of payments constraint to growth, nor a balance of payment crisis and “run on sterling” either.
So there you have it. Growth up, inflation down, unemployment down, borrowing down, it will all look pretty good for the Chancellor this year - just the trade figures alone will continue to disappoint. The full forecasts presentation is available below from the Saturday Economist web site or from the new Chamber of Commerce Economics web site. We will benchmark the economy using this forecast outlook as we move through the year.
That’s all for this week. No Friday Financials this week and possibly no Sunday Times and Croissants tomorrow. The professor and his team are reviewing the Sunday strategy in this pre election year. Have a Happy New Year in any case.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.