UK economy to be fastest growing among G7: poll

A statue of the Duke of Wellington stands outside the Bank of England in London. Britain’s economy will grow faster than any other G7 nation in coming quarters, but the Bank of England will not raise interest rates until next year to avoid choking off the recovery, a Reuters poll showed yesterday.

Reuters/London

Britain’s economy will grow faster than any other G7 nation in coming quarters, but the Bank of England will not raise interest rates until next year to avoid choking off the recovery, a Reuters poll showed yesterday.

The poll of over 50 economists, taken this week, suggested Britain’s gross domestic product (GDP) will grow 0.6% per quarter through to September 2015.

If those forecasts are met, Britain’s economy will be back to its pre-crisis size by the end of June and be the fastest growing amongst the group of seven major industrialised nations.

“The story on the UK remains very positive, with business surveys pointing to robust activity, confidence indicators bouncing strongly, credit growth strengthening and asset prices rising,” said James Knightley at ING.

Britain’s economy will expand 2.7% this year and 2.4% in 2015 and 2016, similar to forecasts made by the Organisation for Economic Cooperation and Development (OECD) on Tuesday.

The eurozone economy, Britain’s main trading partner, is expected to eke out just 1.1% growth this year and 1.4% next, with any deterioration in that highlighted as a risk to British growth.

Quarterly forecasts were unchanged from a February poll and despite the upbeat outlook the latest survey again said it would be next year before the BoE raised interest rates from record lows — and even then by only 25 basis points.

The poll, agreeing with financial markets, says the Bank of England raise its benchmark interest rate to 0.75% in the second quarter of 2015 and by another 25 basis points in the third quarter.

BoE Governor Mark Carney has repeatedly stressed there was no rush to raise rates and that any increases would be gradual. His deputy, Charlie Bean, said earlier yesterday that when the time comes to increase borrowing costs it would be to a level “materially lower than before crisis”.

Bank Rate was raised to 5.75% in July 2007, but fell steadily as the eurozone sovereign debt crisis and a financial meltdown in the US sent the global economy into a tailspin.

In an effort to give markets guidance, the Bank tied the path of monetary policy to unemployment. But Carney was forced to abandon that in February — just six months in — after joblessness fell within a whisker of its 7% target three years earlier than when they first forecast it would.

Instead, he said the Bank would focus on 18 separate measures of data in order to gauge the right time to start raising rates, a move that split economists in a recent Reuters poll as to whether it has improved clarity about where interest rates are headed.

Still, while only four of 46 economists expect any increase this year, there is a median 80% chance that Bank Rate will have risen by the end of 2015 and an almost certain 95% chance before 2016 ends.

More above-inflation rises in minimum wage likely

Britain’s minimum wage is likely to rise faster than inflation for several years to come, so long as the economy continues to improve, the body which advises Britain’s government on the topic said yesterday.

Earlier in the day the government agreed to the Low Pay Commission’s recommendation for a 3% increase in Britain’s minimum wage this year to £6.50 ($10.80), which will be the first above-inflation increase since 2008.

“Provided the economy continues to improve we expect to recommend further progressive real increases in the minimum wage, so that 2014 will mark the start of a new phase of bigger increases,” said David Norgrove, who chairs the commission.

Finance minister George Osborne said in January that he would like to see the minimum wage rise faster than inflation, after several years in which Britons’ living standards have fallen in real terms. The decline in living standards — which continued last year despite a strong pick-up in growth and employment — is now a major theme for the opposition Labour Party, which will face Osborne’s Conservatives in a national election in May 2015.

The increase in the minimum wage will take effect in October, and economists have said the 3% rise may also set a benchmark for private-sector wage deals being negotiated now.

Inflation fell to 1.9% in January, undershooting the Bank of England’s 2% target for the first time since November 2009, but average weekly earnings rose by just 1.1% on the year in the fourth quarter of 2013.

Over the past four years, the minimum wage has risen by an average of 1.9% a year, well below the average inflation rate of 3.3% over the same period.

The Bank of England has said faster real wage growth is needed to sustain consumer demand and Britain’s economic recovery, but that it should be based on an improvement in productivity, which slumped after the financial crisis and has yet to recover significantly.