Consumer spending power is set to rise by 1.5 per cent this year as earnings growth accelerates and headline inflation remains below the Bank of England’s target of 2 per cent, according to a report from an economic think tank.
The Centre for Economics and Business Research (Cebr) also increased its forecast for UK economic growth from 2.8 per cent to 3.1 per cent this year and from 2 per cent to 2.2 per cent in 2015 because of declining unemployment.
According to the Cebr, household incomes, buoyed by the reduction in the rate in unemployment, will grow by 1.5 per cent in 2014 after declining by 0.6 per cent in 2013.
The think tank also said it expected business investment to grow by 10.1 per cent in real terms this year, amid high confidence in economic prospects, but a significant weakness in the current account and Government spending cuts will weigh on growth prospects beyond 2015.
The forecasts suggest that economic growth is likely to peak this year but then fall back during the following two years, as some of the factors driving expansion, such as a return to typical levels of consumer confidence, wear off.
The think tank also warned of a record Government deficit of £79bn this year, driven by spending at 1.8 per cent higher than in 2010, meaning that further and deeper cuts will need to be implemented beyond 2015 if the Chancellor is to “even come close” to meeting his deficit reduction targets beyond 2014.
Currently, the Government is predicting a further £25bn in spending cuts after the next election to balance the books.