National Institute of Economic and Social Research NIESR Prospects for the UK Economy Simon Kirby National Institute Economic Review, November 2013, No. 226

National Institute of Economic and Social Research The evolution of NIESR GDP growth forecasts  GDP forecasts broadly unchanged since August –0.2pp upward revision in 2013, 2014 and 2015 –Growth of 1.4% in 2013 and 2% in 2014, 1.9% in 2015  Compared to forecasts published first half of this year; noticeable upward revision –ONS revisions to estimates of previous quarters  Upward revisions to consumer spending forecasts  Fiscal policy broadly unchanged

National Institute of Economic and Social Research Consumer spending is a necessary driver of recovery  Consumer spending growth of 2% in 2013 and 2.4% in 2014 –House price increases in 2014 add about ½ pp to consumer spending growth –Housing market activity still noticeably below pre-crisis levels  Net trade positive contribution to growth from 2016 –In 2018 UK expected to require foreign financing equivalent to 2.1% of GDP.

National Institute of Economic and Social Research CPI inflation rate to remain above target throughout 2014  Upward revision to rate of inflation in the short term –2.6%pa at the end of 2014  Incorporates the announced price rises of utility companies  Recent appreciation of sterling passes through to CPI

National Institute of Economic and Social Research Unemployment rate is expected to gradually fall  Unemployment rate to pass through MPC’s intermediate threshold of 7% early 2016  Unemployment rate to reach 7.4% mid-2014 –+/- 0.3pp 95% CI on LFS estimates, due to sampling variability –1 in 5 chance rate will drop below 7% in 2014Q1

National Institute of Economic and Social Research Markets have taken little notice of MPC’s forward guidance

National Institute of Economic and Social Research Primary fiscal target met with room to spare  Five year forward horizon rolls on to  CB moves into balance in and surplus in –Cyclically adjusted balance achieved with more than 50% chance of success  Forecasts incorporate revenues from recent asset sales (approx £5bn)  Asset sales continue to pose upside risk to the forecast

National Institute of Economic and Social Research Summary  GDP growth in 2013: 1.4%, 2014: 2.0%, 2015: 1.9%, 2016: 2.1%  GDP to recover pre-recession peak in 2015Q1  Consumer spending main driver of growth this year and next –Supported by housing market, but at the expense of household saving  CPI inflation rate to remain above target in 2014 –2.6% pa at the end of 2014  Real consumer wages to fall further in 2014  Financial markets have taken little notice of MPC’s forward guidance –We assume first Bank Rate increase comes in the second half of 2015  Unemployment rate to drop below 7% at the start of 2016 –20% chance unemployment rate drops below 7% in 2014Q1  Primary target of the Fiscal Mandate to be hit with room to spare

National Institute of Economic and Social Research Forecast summary table

National Institute of Economic and Social Research Comparison with August 2013 forecast (August 2013 forecast in parentheses)  GDP growth: 2013: 1.4% (1.2%), 2014: 2.0% (1.8%), 2015: 1.9% (1.7%), 2016: 2.1% (1.9%)  CPI inflation rate: 2013: 2.6% (2.7%), 2014: 2.5% (2.3%), 2015: 1.9% (2.2%), 2016: 1.9% (1.9%)  Unemployment rate: 2013: 7.8% (8.0%), 2014: 7.4% (7.9%), 2015: 7.2% (7.6%), 2016: 6.8% (7.3%)  PSCB (% of GDP, excluding APF): : -5.5% (-6.0%), : -3.1% (-3.6%), : -1.5% (-2.1%), : -0.2% (-0.9%)  Primary target of Fiscal Mandate met: Yes (Yes)  Secondary target of Fiscal Mandate met: No (No)

National Institute of Economic and Social Research Quarterly GDP growth rates (per cent per quarter): August 2013 and November 2013 forecasts compared Note: cells shaded grey identify the last ONS data point (preliminary estimate of GDP)

National Institute of Economic and Social Research Quarterly unemployment rates (per cent of labour force): August 2013 and November 2013 forecasts compared Note: cells shaded grey identify the last ONS data point

National Institute of Economic and Social Research Quarterly CPI inflation rates (per cent per annum): August 2013 and November 2013 forecasts compared Note: cells shaded grey identify the last ONS data point