|Real GDP growth||2.4%||2.4%|
Source: PwC main scenario projections
Highlights and key messages for business and public policy
The UK economy has slowed a little in 2015 but domestic demand growth remains relatively strong, helped by lower oil prices. The global outlook remains mixed with a gradual pick-up during the year in the US and the Eurozone, but a slowdown in China, recessions in Russia and Brazil, and increased volatility in emerging markets more generally.
In our main scenario we expect UK GDP growth to average around 2.4% in both 2015 and 2016. Consumer spending and business investment will be the main drivers of UK growth in these years.
Risks to growth are weighted somewhat to the downside in the short term due to international risks, particularly in relation to emerging markets. But there are also upside possibilities if the global environment improves and productivity growth rates accelerate in the UK.
London and the South East continue to lead the recovery, with average growth of around 3% in 2015-16, but all other UK regions should also register positive real growth of around 1.6-2.4% per annum over this period.
Inflation has been close to zero this year but seems likely to rise back towards its 2% target by the end of 2016, so the MPC may start to raise interest rates gradually during the first half of next year. Businesses and households should still plan for rates to be back to around 3-3.5% by 2020.
The Autumn Statement is likely to confirm plans for further fiscal tightening to eliminate the budget deficit before the end of this decade (although there seems likely to be some softening of planned tax credit cuts). This will impose some drag on the UK economy, but the private sector should be strong enough to offset this in terms of GDP growth. However, unprotected Whitehall government departments and local authorities in England could face cumulative real budget cuts of around 25% over the next four years.