What will the economy do in 2014? - Image

What will the economy do in 2014?

Last year was a turbulent one for the UK economy. The purported recovery seemed distant to many business owners, despite assurances from the government that the country had “turned a corner”.

Looking forward, the picture seems murky. Will the UK find its gear?

Economic recovery

The question at the forefront of every business owner’s mind is that of the economic recovery. Will 2014 see a return to concerted growth, or will the economy continue to bounce along the bottom? These concerns have grown in recent months, with louder murmurings from commentators about an ‘l-shaped’ recovery, in which the economy never returns to its pre-recession levels.

Some economists, however, are slightly more upbeat. Goldman Sachs expects to see the recovery “sustained” during 2014, and is now predicting 3 per cent growth over the year. The British Chambers of Commerce (BCC), meanwhile, expects to see growth of 2.2 per cent, and of 2.5 per cent in 2015. Gross domestic product is currently 2 per cent lower than its pre-recession level in the first quarter of 2008.

Interest rates

Interest rates are another major question for business owners and for the public at large. A change to the Bank of England’s base rate could have a significant impact on homeowners’ ability to make their debt repayments, and will increase the general cost of credit. Many commentators have suggested that the current recovery is fuelled by debt, and that it may stall in the event of rate rises. All eyes are therefore on the Bank of England’s rate-setting Monetary Policy Committee.

Last year the Governor of the Bank of England indicated that rates would not rise until unemployment fell to 7 per cent, but economists insist that this is just one of many factors that ought to be considered. A recent survey of top economists, made by the BBC, found that the overwhelming majority do not expect to see the base rate rise in 2014, and more than half expect an increase in the first half of 2015. The BCC, meanwhile, expects to see rates rise in early 2016.

Inflation

Many believe that a hike in inflation could threaten the recovery just as severely as an increase in the cost of debt. Rising prices have long been the subject of major political contention, with Labour leader Ed Miliband attempting to centre public debate on what he dubs the “cost of living crisis”. The Bank of England’s official measure of inflation currently rests at 2.1 per cent, just over the Bank’s 2 per cent target. For many consumers, however, this figure bears little relation to reality. Many economists believe that the ‘real’ inflation figure is far higher, and a failure to keep tabs on rising costs could prove a problem during 2014.

House prices

House prices are the final major area of concern, particularly in London. While prices in many parts of the country have either stagnated or seen modest growth, London and Manchester now have housing markets that are routinely described as “super-charged”. This has been exacerbated by the extension of the government’s controversial Help To Buy scheme, which allows borrowers to buy properties with a lower deposit.

Three in five surveyors expect to see further rises in 2014, but opinions vary on the scale of the increase. Halifax suggests that prices could see a hike of as much as 8 per cent, following 2013’s 7.5 per cent rises. Other commentators are slightly more reserved, with the Office for Budget Responsibility and Savills predicting increases of 5.2 and 6.5 per cent respectively.

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