By Graeme Davies
As the turn of the year approaches, all the latest indicators point to a continued improvement in the performance of the UK economy throughout 2014. Indeed, current forecasts suggest GDP growth of 2.4 per cent or more during 2014, which would see the economy finally beginning to achieve the ‘escape velocity’ required to drag itself out of the doldrums it has been stuck in for the past five years.
With confidence finally beginning to take hold, the recovery could become self-fulfilling as businesses are tempted to invest some of the funds they have been holding back in recent years in a bid to better capitalise on the economic upturn. And there are signs that the recovery, which has thus far been driven by an uptick in consumer confidence and initiatives such as the government’s support for the housing market which have boosted the retail and construction sectors, could begin to draw in other sectors.
Indeed, the UK’s manufacturing sector is now forecast to expand next year at an even faster rate than the wider economy. A recent survey by the manufacturer’s organisation, the EEF, and accountants BDO forecast that the manufacturing sector will grow by 2.7 per cent in 2014 after many years of stagnation. Even in 2013 as the economy began to pick up pace, the manufacturing sector is expected to show a marginal contraction of 0.1 per cent. And the aforementioned investment by businesses is also expected to pick up, with investment intentions among manufacturers at a six year high with 16 per cent of companies also reporting plans to increase their numbers employed in the coming three months as they ramp up capacity in anticipation of growing orders.
This likely creation of jobs will also feed into a sense of improved economic well being in the UK economy which will help to further fuel the recovery. Thus the domestic economic situation is looking rather rosier than it was a year ago and there are signs that this recovery will be built on more solid foundations than the brief recovery seen in late 2009 and early 2010, which soon fizzled out. Among the companies at the forefront of the recovery are likely to be those closely linked to the construction sector and its supply chain as well as service companies which benefit from stronger consumer sentiment.
Manufacturers are also likely to see some benefit but, given that they are increasingly tied into the global economy rather than simply the local and domestic UK economy, their fortunes are at more risk from continued weakness in the eurozone economy, a potential stuttering in the US economy caused by tapering of its quantitative easing programme and continued issues in emerging markets which have hit economic growth in powerhouses such as India and Brazil. As has been proven before, it is almost impossible for the UK economy to thrive if the global economy with which it is so intertwined is not firing.
The UK is likely to boast one of the strongest growth rates in the developed world in 2014 and the biggest threats are likely to come from a continued strengthening of the pound, which will hurt exporters, further eurozone weakness, commodity price inflation and the widespread fear that withdrawal of monetary easing in the US could hit the wider global economy. Domestically, concerns could grow if the housing market continues to surge and this could prompt some cooling actions by the Bank of England, although an interest rate hike looks unlikely. Furthermore, the government has to resist the temptation to turn the fiscal screw in terms of further spending cuts as this could choke off domestic economic recovery.
The UK economy looks in a fitter state than it has at any time in the past six years, but risks remain. Nonetheless, those businesses focused on the domestic economy should feel the most confident right now.
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