"Today, I report on a Britain that is growing, creating jobs and paying its way. Britain is on the rise", announced the Chancellor George Osborne during his Budget statement to the House of Commons.
The latest figures revealed by the Office for Budget Responsibility for 2015 seem to indicate that Britain is, in fact, on the path to recovery. According to the OBR, the GDP growth forecast for this year was upgraded from 2.4% to 2.5%. The British Chambers of Commerce puts Britain's GDP growth for 2015 between 2.6% and 2.7%. These figures mean that Britain will be the second fastest growing economy in the G7, only behind the US.
All these optimistic predictions for Britain's economy in 2015 and beyond cite household consumption as the main catalyst for growth, fueled mostly by low inflation and rising wages. The OBR predicts an average inflation of 0.2% in 2015 caused mostly by falling oil prices. The flat 0% inflation rate registered in February is a record low since the consumers' price index started being used as the yardstick, in 1989. Such low inflation when combined with falling unemployment helps explain rising living standards, consumer spending and growth. According to a special report from Ernst & Young ITEM Club, pay will only grow 1.9% in 2015, which is still 2.5% short of the pre-crisis average. Nevertheless it will be the first year since 2007 which sees a real increase on earnings, mostly due to the record-low inflation.
This one-off record-low inflation, caused by the more than halving of oil prices, is set to increase in the coming years. Wages will need to follow and rise considerably more than the current 1.6% yearly average or the current GDP growth might not be sustainable.
According to the OCDE and British Commerce Chambers' forecasts, U.K.
productivity will register slower increases in the next few years than before the crisis, which will hold back real wage growth. The OCED concludes that "boosting productivity growth will be a key challenge for the coming years in Britain". Without it, living standards and consumption will not be able to follow the rise of inflation, in the future.
This current rise in household consumption does not seem to be creating the necessary positive cycle that would result in bigger business Investment either. The British Chambers of Commerce reviewed its UK business investment growth forecast for 2015 from 7.5% to 3.5%. This means business investment should fall almost 50% this year, from the 6.8% registered in 2014.
Predictions of a 7.2% growth in investment during 2016 and 7.4% in 2017, might still also be reviewed depending on the outcome and evolution of various domestic and international factors. The Director General of the British Chambers of Commerce, John Longworth, explains that "UK firms still face considerable uncertainty - including global tensions, the stagnating Eurozone and the most wide open UK general election in decades".
Other economists point to the looming threats of an EU referendum and a Grexit as additional factors that are holding investment and confidence back.
The Chief Economist of the British Chambers of Commerce, David Kern, believes that "greater efforts are needed to rebalance our economy, away from growth that is dependent on consumer spending towards long-term growth that is based on business investment and exports".
Although GDP growth rate predictions between 2.5% and 2.7% are undoubtedly positive signs, their sustainability and their real effect on the other major growth factors is still depending from various major external factors. Most of this positive tendency is being caused by an increase in household consumption that can only be maintained if wages are able to follow the rise that will be seen in inflation rates. So, how much of this recent growth is built mostly on record low inflation caused by the recent slide in oil prices to below $60 a barrel is still a question to be answered in the coming years.
