Household consumption expected to drive economic boost (Reuters)
Britain's economic growth will return to its pre-recession peak during 2014, but it will be driven largely by an unsustainable level of household spending and rising house prices.
According to forecasts by the British Chambers of Commerce (BCC), UK GDP will grow at a rate of 2.7% in 2014. This will be higher than the annualised pre-recession peak in the first quarter of 2008.
However, as household spending slows because of rising personal debt amid a real terms wage decline, so will GDP in 2015. Growth will slide to 2.4% across the year.
"We expect GDP growth to remain strong in the short-term, as the housing market continues to boost household consumption," said David Kern, BCC chief economist.
"But while it was necessary to rely on the consumer and on housing in the early part of the recovery, it must now become more balanced, particularly towards exports, as household consumption will slow.
"While we forecast a degree of rebalancing, net exports are not making enough progress, and risks still emanate from the eurozone where the present calm could be deceptive."
BCC said the trade balance will continue to narrow gradually as it has done since the financial crisis, but this is because of higher services exports rather than goods as manufacturing output declines in 2014. Business investment will collapse in 2014 said BCC, but pick up again in 2015 and 2016.
Chancellor George Osborne set himself the goal of a trade-led recovery by growing exports to a £1tn total value by the end of the decade, but a global downturn triggered by the eurozone crisis has hurt the UK's key markets and weakened demand for British-manufactured goods.
As a result, accelerating GDP is powered by rising house prices, amid mortgage easing stimulus such as Help to Buy, and consumer spending.
Household consumption has been growing as property prices lift, even though wages are still in sharp real terms decline. Consumers have worn down savings or leveraged themselves with even more debt instead of relying on better pay to fuel consumption.
Osborne hit back at critics of the UK recovery and insisted that it is sustainable and a rebalancing is taking place.
"We are seeing growth in manufacturing. We're seeing growth in construction," said the chancellor.
"We've got to make sure that Britain earns its way in the world and not repeat the mistakes of the past, but I'd say the plan is working. The job is not done and we've got to now work through that plan."
The Office for Budget Responsibility (OBR), the independent fiscal watchdog, forecasts household spending and the housing market to be the main drivers of GDP growth, as business investment and net trade remain flat.
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