UK Economic Outlook: What will drive future growth? 25 th November 2014 Richard Holt Head of Global Cities Research

1 Recent trends

Data revisions have ‘improved’ UK’s growth

Business momentum across sectors

Demand is strong & well balanced (domestically)

2 Investment

Less need for catch up in business investment

But corporate profitability looking good

So manufacturers (others) plan to invest

Fixed investment growing quite fast this year 2013: up 3.2% 2014: up 8.5% Then gradually slows to 4½% growth by 2018

3 Trade

The Eurozone recovery has stalled

China is slowing down

Those & other upsets are hurting UK exports

Long-term view: China may continue to slow

World economy: moderate long-term growth

Exports weak this year but improve next Exports of goods & services 0.4% down this year in real terms 2015 up 4.4% Subsequent years 5% to 6% a year growth

4 Consumption

2014 real incomes driven by rising employment

In 2015 productivity gains will slow this down

Evidence on wages growth v mixed

But fundamentals should push wages up

Meanwhile oil prices will help to keep inflation low

So sustained real wage growth in prospect

Steady not spectacular consumer spending rises 1.6% growth last year, 2.1% this year, then 2.3%, then 2.2%, 2.5%, 2.6%...

5 Fiscal & monetary policies

2014/15: winners/losers from tax/benefit changes

But big government spending cuts still to come UK: Departmental current spending to

However, MPC remains dovish

So first interest rate hike a good way off

Government spending is going negative Government consumption rises 1% this year, flat in 2015, then steadily falls by about 1% a year for several years at least

6 Fundamentals

Exports: huge reliance on net exports of services

Key export sectors

European car sales revival adding to UK demand

Huge backlog of orders for airliners (& engines)

But pharmaceutical sector struggling

Competitiveness issues facing other chemicals

Digital, professional & support services

Services exports currently skewed towards USA

China’s imports of services set to grow hugely

Competition in the R&D space very intense

In the UK 2 regions (+ North West?) stand out

7 Conclusions

Nothing is certain

But the broad pattern is likely to be…

Clearly, more exports would be nice to have

And a lot more R&D (and innovation generally)

UK forecast summary

UK Economic Outlook: What will drive future growth? 25 th November 2014