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OPINION

UK slowdown "only temporary"

UK slowdown "only temporary"
January 29, 2015
UK slowdown "only temporary"

Official figures this week showed that real GDP grew by just 0.5 per cent in the final quarter of 2014, after 0.7 per cent growth in the third quarter, as industrial production and construction output fell. But Martin Beck at the EY Item Club says this is "little cause for concern". He believes the fall in oil prices will give "a substantial boost to consumers' spending power" which will cause economic activity to pick up this year. With the UK consuming 1.5m barrels of oil a day, the $60 per barrel drop in prices since the summer will, if it persists, add around 1.2 per cent to oil users' real incomes.

Economists believe we might see the benefits of lower oil prices in next week's figures; purchasing managers in the eurozone, US and UK could report a pick-up in activity.

Not everyone is so optimistic, however. One problem is that, on current plans, fiscal austerity will resume soon. The OBR estimates that cyclically adjusted net borrowing - a measure of fiscal policy - actually increased slightly in 2014-15; it might be no accident that this coincided with faster growth. But it expects borrowing on this measure to fall by 0.6 per cent of GDP in 2015-16, implying a tighter policy.

Barclays' Fabrice Montagne adds that the policy uncertainty created by the general election might deter businesses from investing: not knowing the future government means businesses don't know what the mix of monetary and fiscal policy will be next year, nor the UK's relations with the EU. Such uncertainty might be heightened by doubts about the future of the eurozone following Syriza's victory in last week's Greek elections.

What's more, says Fathom Consulting's Danny Gabay, even the fall in oil prices might not boost the economy much. He believes consumers will use the windfall to pay off debt rather than to spend: Bank of England figures show that personal debt is £1.46 trillion, equivalent to 124 per cent of disposable income. This, he says, points to activity continuing to slow down; he forecasts GDP growth of just 2.1 per cent this year and warns: "We find it hard to envisage a rate rise before 2017".