Market Insight - May/June 2015
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A feeble forecast?
The Bank of England has revised down its economic forecast - but no need for alarm.

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The Bank of England downgraded its forecast for UK economic growth in its latest quarterly Inflation Report. That might sound like things are getting worse, but actually they’re not. The Bank of England has been a little bit more optimistic than most other economic forecasters, so the downward revision simply brings it into line with the rest. The expectation is that UK GDP will grow by 2.6 per cent, rather than the 2.9 per cent estimate in February, followed by an average of 2.5 per cent in 2016 and 2017. That rate of growth is still respectable – and around about the long term trend of the UK.

A little more worrying is the reason for the downgrade. Dr Carney, the Governor, points to low productivity. That means as a country we need more people to work to produce the same amount of wealth than we used to and more importantly than some of our neighbours do. If the UK doesn’t turn that around, the pace at which the economy can grow will be limited, which will affect our standard of living.

More investment can turn that around and now the party favoured by business is in power that should begin to be resolved. In the meantime there is another bit of good news - the pace of wage growth is increasing. On its own it is a good sign that the economy is picking up, but along with low inflation it also means that spending power is rising, which is helpful for the housing market as well as the wider economy. As wages increase, the ability to borrow will improve, and with mortgage rates at an all-time low, that spells good news for transaction levels.

Even if a downgrading of the growth forecast sounds like it might be disappointing, it does mean that interest rates are likely to remain lower for longer. The Bank factors in the market’s expectation that rates will begin to rise from the summer of next year, but has repeated the mantra that any increase in rates will be gradual and that it will remain below historic averages for some time to come. 

Overall, the outlook for the UK economy is good. Employment is still increasing, prices are falling, wages are rising and interest rates are set to stay low – what’s not to like?

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