Growth to accelerate as the economy bounces back

Exports and investment will replace consumer spending as driving force, predict economists

ECONOMIC growth will speed up again in the coming months as investment rises and the global recovery means more foreign demand for UK exports, economists believe.

Manufacturers reported strong orders from customers in the US, Canada, Asia and Europe in July, with one of the most rapid growth spurts in the past 20 years pushing factories to hire more staff.

British factories are growing faster than their competitors in France, Spain and Ireland in a sign that, a year after the Brexit vote, the UK is not falling behind the eurozone according to the purchasing managers’ index, compiled

‘If you look below the bonnet of our forecasts, consumer spending is no longer the engine of growth for the UK’

by IHS Markit. Economic growth overall reached a low of 0.2pc in the first three months of the year, edged up to 0.3pc in the second quarter – just half the pace of growth in the eurozone over the same period.

However, the National Institute for Economic and Social Research (Niesr) believes UK growth will catch up with the Continent quickly, rising to 0.4pc in the third and fourth quarters and 0.5pc into early next year.

Overall the analysts believe the UK will grow by 1.7pc this year, 1.9pc in 2018, 2pc in 2019 and 1.8pc in both 2020 and 2021.

That compares with expected eurozone growth of 2pc this year and 1.9pc next year. “It is a gentle increase over the next few quarters,” said Amit Kara, Niesr’s Head of UK macroeconomics research.

“If you look below the bonnet of our forecasts, consumer spending is no longer the engine of growth for the UK next year – the contribution shrinks to almost nothing.

“What is picking up is the contribution of exports, which is in large part because of our more optimistic view on the global economy including the eurozone, and also because of investment.”

Niesr has upgraded its global growth forecast, anticipating GDP worldwide will rise by 3.6pc this year, better than the 3.3pc growth the researchers predicted in May.

Rob Dobson, a senior economist at Markit, said the global upturn was becoming an increasing factor in the rise in manufacturing activity.

“Although the exchange rate remains a key driver of export growth, manufacturers also benefitted from stronger economic growth in key markets in the euro area, North America and Asia-pacific regions,” he said.

Mr Dobson noted that price pressures continued to ease back, which should feed through to reduce inflation on the high street.

The anticipated acceleration in GDP growth means Niesr wants the Bank of England to start discussing its plans to begin returning interest rates to a more normal level, above their current emergency rates.

Mr Kara said the Bank of England “should withdraw some of that stimulus in six or eight months’ time, if the econ- omy evolves as we forecast, which is with further strengthening in growth”.

That would involve raising interest rates to 0.5pc, the level which rates were at before last August’s cut to 0.25pc.

Niesr’s director Jagjit Chadha said the Bank of England must be careful to explain its thoughts on interest rates and encouraged the Monetary Policy Committee to publish each policymaker’s predictions so as to avoid confusing or surprising the public.