U.K. Economic Outlook 2015: Economic Crisis Averted?

U.K. Economic OutlookLike the broader global economy, the U.K. economy took a hammering back in 2008. While the global economy, especially the eurozone, continues to struggle, our U.K. economic outlook for 2015 has turned a corner with the country’s economic recovery gaining momentum.

U.K. Economic Outlook 2015: Looking Back on U.K. Economy in Crisis

It didn’t take long for the effects of the U.S. subprime mortgage-induced financial crisis to be felt around the world. On September 15, 2008, Lehman Brothers filed for bankruptcy with $639 billion in assets and $619 billion in debt. Lehman was the fourth-largest investment bank in the U.S.

Less than a month later, Sir Tom McKillop, chairman of the Royal Bank of Scotland, Britain’s largest bank, told Chancellor Alistair Darling that it was “haemorrhaging cash.” The Royal Bank of Scotland was in so much trouble, it only had enough money to last for another two or three hours. (Source: The Guardian, September 13, 2013.)

This is a far cry from autumn 2007 when the Royal Bank of Scotland announced a record operating profit of £10.3 billion, the equivalent of £1.0 million per hour. Fast-forward to January 2009, and the same bank posted a loss of £28.0 billion, the largest in British corporate history. (Source: The Telegraph, January 20, 2009.)

Like the rest of the developed world, the U.K. economy went into a tailspin. First off was the London Stock Exchange. Between September 2008 and March 2009 when the markets bottomed, the FTSE 100 index plunged almost 40%.

The U.K. economy followed in step. In 2007, the U.K. reported a gross domestic product (GDP) growth of 2.7%. By 2008, the country had slipped into the negative, reporting a GDP of -0.3%. It got worse in 2009 when the economy stalled -4.3%. (Source: World Bank web site, last accessed April 22, 2015.)

In an effort to help kick-start the economy, the Bank of England purchased an estimated £375 billion of government bonds. Between March and November 2009 alone, the bank bought £200 billion worth of bonds. In 2009, the bank also cut the cost of borrowing to 0.5%—the lowest since the Bank of England was formed in 1694.

Over the next four years, the U.K. economy struggled to gain traction, with GDP growing 1.9% in 2010, just 1.6% in 2011, and 0.7% in 2012. In early 2009, the U.K. unemployment rate was just under seven percent. By late 2011, U.K. unemployment peaked at just less than 8.5%.

U.K. Economy Turns the Corner

In 2013, the U.K. economic outlook changed. Between 2013 and 2014, business investment climbed from negative one percent to 10.7%; investment increased from -0.8% to 7.1%; household consumption climbed from 2.2% to 2.9%; exports inched up from 0.4% to 0.8%; while GDP jumped from 1.7% to 2.8%. Unemployment has also been on the decline, from around 7.9% at the beginning of 2013 to 5.6% today. (Source: The Week web site, last accessed April 22, 2015.)

Overall, the FTSE has recovered and is up more than 100% since bottoming in March 2009. It is also up roughly five percent over its pre-recession highs at a record 7,028.00. More recently, the FTSE is up almost 20% since the beginning of 2013.

Forecasts for the U.K. Economy: Economic Growth Ahead

Thanks to the easing of austerity measures and falling oil prices, the U.K. economy is expected to continue to improve over the next two years. The EY Item Club (a non-governmental economic forecasting group) predicts U.K. GDP growth in 2015 will mirror that of 2014, when it was the fastest growing economy in the G7, and strengthen to three percent in 2016. (Source: The Telegraph, April 20, 2015.)

On top of that, most economists expect the Bank of England to wait until 2016 before raising interest rates, which have been pegged at near zero for more than half a decade.  Even though the U.K. economy is outpacing its G7 peers, lower oil prices have sent inflation to zero. Before raising interest rates, the Bank of England has targeted an inflation rate of around two percent. And few expect it to be at that level before the middle of 2016.

This is good news for most Britons where wage growth, while not stagnant, is nothing to cheer about. Average earnings in the three months to January 2015 increased at an annual rate of 1.6%, slightly weaker than the 1.7% for the three months to December 2014. (Source: The Guardian, March 18, 2015.)

The lack of wage growth could hurt the U.K. economy. This is highly reliant on consumer spending, which is reliant on continued low inflation. The U.K. economy continues to look robust for 2015 and even 2016.

There could be a hiccup in the U.K. economic recovery. Britons go to the polls on May 7 in what is expected to be one of the most closest-fought national elections in decades. A string of positive U.K. economic data could give the ruling Conservatives a boost ahead of the general election.