Britain’s growth prospects upgraded by European Commission

Britain’s growth prospects have been upgraded by the European Commission, with lower unemployment, stronger investment and an improving current account deficit reinforcing the view that the recovery will broaden this year.

The EC now expects the UK to grow by 2.5pc in 2014, compared with a forecast of 2.2pc in November. Its forecast for 2015 was unchanged at 2.4pc. Back in November, the EC predicted Britain would grow by just 1.3pc in 2013, much lower than the outturn of 1.9pc.

The Winter forecast also highlighted the strength of Britain’s labour market, with employment growth this year expected to rise above the average levels seen in the decade before the financial crisis.

Britain’s jobless rate is also expected to fall to 6.8pc by the end of the year, while inflation will stay close to the Bank of England’s 2pc target until the end of 2015, according to the EC.

The EC also expects total investment to increase by 6.5pc this year, after contracting 1.8pc in 2013. The upbeat forecast – which includes business investment – joins stronger forecasts by the Confederation of Business Industry (CBI) and the Bank of England, which expects double-digit business investment growth this year.

Despite signs of a broader recovery, the Commission warned growth would remain reliant on private consumption, which drove three-quarters of output in 2013, and said interest rate rises could also dampen growth.

"The outlook for growth is now stronger than has been in recent years," the Commission said, "although growth is likely to continue to come almost exclusively from domestic demand with private consumption being the main contributor and investment playing a more important role as time progresses.

"Domestic demand may be more dynamic than estimated as sentiment indicators are high. However, the upturn in investment may fail to materialise and private consumption may decline sizeably, as a result of continued weak wage growth, interest rate rises or the household debt burden weighing down on spending."

The Commission also expects Britain’s current account deficit to narrow to 3.3pc of gross domestic product (GDP) in 2014, from 3.8pc last year on the back of rising exports to China and Ireland. Back in November, it predicted the deficit would balloon to 4.4pc.

Despite the upgrade, Britain’s current account deficit, which measures trade, will remain the highest in the European Union. Some economists have warned that the strengthening pound could hamper export growth in the coming year. The EC also said Britain’s £1.24 trillion debt pile had not yet reached its peak.

Earlier this month, Mark Carney, the Governor of the Bank of England, said Britain must see a business recovery before interest rates can begin to rise, while Chancellor George Osborne has warned that the recovery would not be secure until growth moved away from relaince on consumer spending.

Tuesday’s upgrade by the European Commission follows similar revisions by the International Monetary Fund and Organisation for Economic Co-operation and Development (OECD).

While the Commission upgraded its forecast for eurozone growth in 2014 to 1.2pc, from 1.1pc, and 1.8pc in 2015, from 1.7pc, the forecasts highlighted mixed fortunes for the 18 nation bloc.

The Netherlands received the biggest percentage point upgrade in the eurozone. It is expected to grow 1pc this year, from a November forecast of 0.2pc, while Belgium and Spain also received upgrades.

"Recovery is gaining ground in Europe, following the return to growth in the middle of last year," said Olli Rehn, Commission Vice President for Economic and Monetary Affairs. The strengthening of domestic demand this year should help us to achieve more balanced and sustainable growth. Rebalancing of the European economy has been progressing and external competitiveness is improving, particularly in the most vulnerable countries."

By contrast, the Commission now expects deeper contractions in Cyprus and Slovenia. Across the EU, growth was also upgraded marginally, from a forecast of zero growth to 0.1pc this year – rising to 1.5pc in 2015.

"The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest. To make the recovery stronger and create more jobs, we need to stay the course of economic reform," said Mr Rehn.

Source:www.telegraph.co.uk