UK Economic Outlook July 2011: Highlights and key messages for business

  • In our main scenario we project modest average GDP growth of around 1.3% in 2011 and 2.2% in 2012.
  • We expect real consumer spending to shrink in 2011 as fiscal policy tightens, credit conditions remain tight and price rises continue to outstrip earnings growth. Consumer spending growth should resume in 2012 but will remain modest.
  • The main drivers of growth in 2011-12 are expected to be net exports and, in 2012, business investment.
  • Public spending growth remained positive in the first quarter of 2011, but will be cut back sharply over the next four years. This fiscal squeeze will act as a drag on growth, particularly in Northern Ireland, Wales, Scotland and the North East.
  • Although inflation will remain well above the MPC’s 2% target during 2011, underlying domestic inflationary pressures do not appear to be a major concern at present given continued subdued earnings growth. This should allow the Bank of England to avoid an immediate rise in base rates, although in our main scenario we expect them to start raising rates gradually in late 2011 and through 2012.  
  • Risks around growth in our main scenario are weighted to the downside at present, while inflation risks are weighted to the upside. We therefore recommend that businesses should stress test their plans and valuations against an alternative ‘double dip recession’ scenario. But they should also consider a scenario where UK wage and price inflation is higher, prompting interest rates to rise sooner and faster than in our main scenario.

House prices to remain subdued for some years

  • Our first special focus article in this report looks at the outlook for UK house prices, which we expect to remain weak for some time due to subdued real earnings growth and a gradual rise in mortgage rates over the next few years.
  • We only see a 12% chance that real house prices will have returned to their 2007 peak by 2015. This will dampen demand for household durables and also contribute to relatively slow growth in consumer spending more generally over the next few years.

Ageing population will pose challenges for public finances

  • The second special article focuses on the long-term sustainability of the public finances with an ageing population. A higher state pension age and reforms to health and long term care are likely to be required to keep public spending under control in the long run.