Rising consumer spending and a surging housing market have put the UK’s recovery firmly on track, according to an influential forecasting body.
The Ernst & Young Item Club said the UK’s recovery has “finally got legs”, as it almost doubled its forecast for growth this year to 1.1%, up from 0.6% just three months ago.
Government schemes will continue to spur the housing market, it said, but added that consumers will fund higher spending by dipping into their savings, rather than through a big increase in household incomes.
However, Item said a rebalancing of the UK economy remains unlikely this year, with subdued exports and growth driven by consumers.
It expects a long-awaited revival in exports and business investment next year, reflecting a recovery in the United States, pro-growth policies in Europe and a shift towards consumption in China.
Item expects house prices to rise 2.3% this year and 5.5% next year.
Despite only modest increases in real incomes, Item expects consumer spending to increase 1.6% this year and 1.9% next year. However, it predicts the savings ratio will dip to 5.6% from 6.3% last year.
Total pay increased by 1.3% in the year to April, official figures showed recently, failing to keep pace with inflation of 2.7%.
The economy is widely expected to have grown by at least 0.5% in the second quarter, from 0.3% in the first quarter.
Item believes gross domestic product will accelerate to 2.2% next year and 2.6% in 2015.
It predicts export growth will remain subdued at 1.2% this year, before surging to 4.6% next year.
Item stands for Independent Treasury Economic Model, and uses the Treasury model for its analysis.