World Bank forecasts 2.6% real GDP growth in the UK for 2016
The interrelatedness of the global economy adds pressure to the UK economy
One would be remiss about delving into the intricacies of UK economic strength or weakness without first contemplating the broader economic picture. As it stands, emerging market weakness is weighing heavily on growth prospects for developed countries such as the United Kingdom. The recovery in emerging markets has been described as anaemic at best, fueled by massive contractions in demand by China, USD strength, euro area weakness and negative interest rates in Japan. Nonetheless the growth of emerging markets in 2016 is forecast at 2.9% per annum up from 2.4% in 2015.
The British Chambers of Commerce upgraded its growth forecast for 2016 to 2.6% from 2.4% and for 2017 at 2.6%. The reasons for the upgrades from the BCC are a result of a strong uptick in household consumption and services growth. The BCC previously forecast interest rates to rise in Q1 2016, but that seems unlikely at this juncture given the state of the global economy. Massive selloffs of equities have rocked global financial markets and major averages are now all deeply in the red for 2016. The FTSE 100 index (a cap-weighted index of top UK stocks) is currently trading at 5707.6 GBP, with a 1-year change of -16.4%. The 52-week range 40 index is 5,499.51 on the low end and 7,122.74 on the high end. Over the past week, starting on Monday, 8 February and ending on Friday, 12 February, the FTSE 100 index has enjoyed 2 days of gains and 3 days of losses. The recent performance is as follows:
- Monday, 8 February – -2.71%
- Tuesday, 9 February – -1%
- Wednesday, 10 February – +0.71%
- Thursday, 11 February – -2.39%
- Friday, 12 February – +3.08%
Economic Forecasts for the UK Until 2020
The GDP growth rate is expected to increase to 0.6% in Q2 2016, drop to 0.5% in Q3 2016 and drop to 0.4% by Q4 2016. By 2020 the GDP growth rate is expected to be 0.5%. The unemployment rate in the UK is currently at 5.10% and is expected to drop to 4.8% by the end of Q1 2016, 4.6% by Q2 2016, 4.5% in Q3 2016 and 4.3% in Q4 2016. By 2020 the estimation is 6.5%. The UK inflation rate is currently at 0.20% and is expected to increase to 0.4% by the end of Q1 2016. By Q2 2016 it is expected to rise further to 0.5%, 0.7% in Q3 2016, and 0.8% in Q4 2016. By 2020 the inflation rate is expected to be 2.1%. As for the interest-rate, it is currently at 0.50%. It will remain there until Q4 2016 when it is likely to increase to 0.75% and by 2020 the interest rate is expected to be 3.5%. In terms of government debt to GDP ratio, it is presently at 88.6, and will rise to 90.04 in Q1 2016, drop to 89.02 in Q2 2016, drop further to 87.99 in Q3 2016 and decline to 86.97 by Q4 2016. By 2020 the government debt to GDP ratio is expected to be 84.9.
Revisions to growth forecasts present bearish picture
The FTSE 100 index is currently trading at 5707.6, and is expected to increase to 5770 by the end of Q1 2016, 5590 by Q2 2016, 5410 by Q3 2016 and 5300 by Q4 2016. These are clear bearish trends which have been calculated by economists and analysts based on the fundamentals of the UK economy and the global economy. By 2020 the gross forecast for the stock market is 7,360 points. There has been a significant downgrade of UK economic performance by the Confederation of British Industry (CBI). The employers’ organisation has downgraded its outlook for the UK economy by 0.3%. The CBI is bearish on GDP growth for 2016 and 2017, with GDP rates of 2.3% for the current year and 2.1% for 2017. These forecasts are 0.3% lower than the prior forecast by the CBI. At the heart of the downgrades are constraints on UK spending as a result of lacklustre increases in pay. Productivity levels are declining in the UK and this is hampering the growth prospects for the economy overall. As a result of lower growth, the BoE will likely maintain interest rates at the current level of 0.5%.
The Office for Budget Responsibility is slated to release its forecast in March 2016, and downward revisions for UK economic growth are expected. A weak gross domestic product would reduce tax revenues for the government which are currently at £69 billion and will likely drop to £47 billion in 2016/17. However unlike many market analysts who fear the negative effects of the global economic meltdown, the CBI does not believe that weakness in emerging market economies and with commodities will adversely affect the economy of the United Kingdom. Naturally the major concern for the UK economy and forecasters is the issue of increasing productivity to maintain wage growth.