Review of the year: Mixed fortunes for UK economy during 2015
PUBLISHED: 11:39 30 December 2015 | UPDATED: 11:39 30 December 2015
It has been a mixed year for the UK economy as efforts to diversify towards exports and manufacturing failed to gain traction. HOLLY WILLIAMS looks back on 2015.
Britain’s economy saw mixed fortunes in 2015 as growth stuttered amid warnings the UK is too reliant on consumer spending fuelled by ultra low inflation and rock-bottom borrowing costs.
Shock revisions to growth in the third and second quarters, which came just a day after worse-than-expected borrowing figures, meant the economy ended 2015 on a sour note.
Interest rates were also in sharp focus as the US Federal Reserve finally pulled the trigger on its first hike in nearly a decade, seeing monetary policy in Europe and America move in opposite directions.
The UK notched up its eleventh quarter in a row of gross domestic product (GDP) growth by the end of September, but output was modest and came against the backdrop of a slowing global economy.
December’s revisions from the Office for National Statistics (ONS) meant growth stood at 0.4pc in the three months to the end of September, down from the initial estimate of 0.5pc.
Expansion was also revised down to 0.5pc for the quarter to the end of June, from the initially robust 0.7pc previously recorded.
The data meant expansion overall has been muted for much of 2015, following a disappointing start to the year, when growth fell to a paltry 0.4pc from 0.8pc the previous quarter.
The second and third quarters failed to deliver on hopes for a pick-up as the manufacturing and construction sectors faltered.
But the dominant services sector has been surging ahead thanks to buoyant consumer spending, boosted by record low mortgage rates and as wages continue to outstrip inflation – with Britain even seeing its first bout of mild deflation since 1960.
The Bank of England sent out confusing messages over interest rates after governor Mark Carney cautioned that the prospect of a rise would come into “sharper relief” at the turn of the year, only to signal in the Bank’s last forecast of 2015 that the cost of borrowing was likely to remain on hold until the end of 2016.
America’s first rise since the summer of 2006 has put fresh pressure on the Bank to follow suit, although Mr Carney has been quick to reassure that rates will only begin to rise from the historic low of 0.5pc when UK economic conditions allow.
The weaker-than-previously thought performance from the UK economy in the second and third quarters means the Bank is unlikely to be in any rush to raise interest rates.
Meanwhile, the European Central Bank announced more economy-boosting measures in early December, cutting overnight deposit rates from minus 0.2pc to minus 0.3pc and extended a 60 billion euro (£43bn) stimulus programme by six months. While end of year economic data came as a blow to chancellor George Osborne, he was handed a welcome boost from the Office for Budget Responsibility (OBR) when the Autumn Statement revealed a £27bn boost to the public finances.
The OBR also said the UK was expected to narrowly beat its borrowing goal this year and remain on target to move into surplus by 2020.
This confounded many experts, who had predicted the chancellor would have to push back his target to get out of the red and into the black.
Public sector finance figures for November soon cast doubt on the OBR’s predictions, when government borrowing increased by £1.3bn year-on-year to a worse-than-expected £14.2bn.
Growth predictions have also been cut for 2015 as a whole after the December revisions by the ONS, with most economists forecasting expansion to have slowed to around 2.2pc from nearly 3pc in 2014.
Forecasts for global growth have also been slashed due to the slowdown in emerging markets and China.
This gloomier international picture has weighed heavy on the manufacturing sector in the UK, leading experts at the British Chambers of Commerce (BCC) to lower their UK growth forecasts and warn the UK needs to rebalance away from debt-fuelled consumer spending.
John Longworth, director general of the BCC, said Britain needed to invest to help firms export to narrow the trade gap, while more also needed to be spent on infrastructure to reduce reliance on services and help boost manufacturing.
Economists believe the final quarter of 2015 will see growth edge back up, to 0.6pc, in line with forecasts from the Bank of England.
While the economy still faces some challenges in terms of rebalancing and global woes, experts believe 2016 will be another bumper year for consumers.