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News : UK Economy Last Updated: Oct 14, 2013 - 7:53 AM

UK recovery could cut public borrowing by £45bn in coming years
By Michael Hennigan, Finfacts founder and editor
Oct 14, 2013 - 4:22 AM

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A UK recovery could cut public borrowing by £45bn in coming years according to a report published today by the Ernst & Young Item Club.

The deficit in 2013-14 is forecast to be £8 to £9bn less than the £119.8bn predicted by the chancellor in his March 2013 budget, the report says and in subsequent years borrowing will be around £9bn lower than expected up to 2017-18 because of stronger economic growth.

The report says that the government’s Help to Buy Mortgage Guarantee Scheme will lead to a rapid improvement in prospects for the housing market. Over a million people are expected to move home this year alone, while investment in new housing projects is set to increase by 7.5% next year and an additional 10% in 2015, predicts the report.

The EY ITEM Club’s autumn forecast  [pdf] says the boost to housing demand will have a knock on effect on house prices, rising by 3.5% this year and 6.6% in 2014. However, it says that fears of a housing bubble are unfounded and premature at best.

This improving outlook for the housing market and consumer confidence has contributed to upward revisions to the EY ITEM Club’s latest growth forecasts for the UK economy. GDP is expected to reach 1.4% this year and 2.4% in 2014 - - up from the 1.1% and 2.2% respectively that were predicted last quarter.

Housing bubble hysteria unfounded says EY ITEM Club: Peter Spencer, chief economic advisor to the EY ITEM Club comments: “The Government’s efforts to revive the mortgage market have been well-timed and targeted, and will benefit most regions in England.

“Despite the recent criticism of these initiatives, the chances of seeing another housing market bubble are extremely slim. House prices and transactions are only just recovering from the credit crunch and will be paltry in comparison to those of a decade ago. Household finances are also in much better shape, with debt to income ratios now at sustainable levels.

“Lenders will still check that the borrower’s income is sufficient to support the loan and this check is the main protection against rising interest rates and other problems in the future,” he added.

UK’s short term growth remains reliant on the consumer: According to the report, the UK’s short term growth will continue to be fuelled by the consumer. The recovery of the housing market, combined with falling unemployment, rising real incomes and improving confidence levels, will help to keep the tills ringing on the high street.

Despite only modest increases in disposable incomes of 0.2% this year, consumer spending is forecast to grow by 1.6% before rising to 1.9% in 2014. Although the report warns that this latest spending splurge means we will be saving less than before, with saving ratios easing back to 5.7%, down from last year’s 6.8%.

Business investment and export revival will kick in next year: However, the most significant boost to UK growth will come next year, when the revival in business investment and exports - - heralded by recent surveys - - finally kicks in. With the economy on a more sustained path of recovery, the Bank of England signalling that interest rates aren’t about to rise anytime soon, and the Eurozone crisis in remission, the EY ITEM Club expects business investment to increase by nearly 7% in 2014 and 9.4% in 2015, after falling by 5.6% this year.

An improving outlook for world trade, particularly in key markets such as the US, Europe and China, will also see exports grow by 2.5% this year, rising to 5.3% in 2014 and 6% in 2015.

Mark Gregory, EY’s chief economist, comments that business confidence has been improving but has yet to be translated into capital spending: “After the slowest recovery from a recession in generations, it’s perhaps unsurprising that business investment to date has been cautious. But with the recovery now gathering pace, staying in wait and see mode is no longer a viable option. Businesses will need to keep a close eye on the economic indicators to ensure they are ready to move when the tide turns.

“With the collapse in investment and M&A in recent years and an increasing reliance on temporary and part-time staff, businesses will need to act swiftly to avoid capacity shortages and to be in a position to drive export growth,” he added.

But a lot still hangs in the balance: Concluding, Spencer says that the UK recovery has become firmly entrenched but there are still some big risks to the forecast. “The boost from the consumer has pushed the UK economy into a progressively higher orbit, but this now needs to be supplemented by a thrust from the engines of export and investment. Otherwise, there’s a real risk that the recovery will falter in the face of the sustained pressure on real incomes from high prices and low wage inflation.”

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