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UK economy to rebound strongly in 2015

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UK economy to rebound strongly in 2015

After having barely avoided a triple-dip recession in 2012, the UK economy appears to be headed in the right direction, albeit ever so gradually. Anticipation over the arrival of new Bank of England governor Mark Carney created an overwhelming sense of uncertainty for British assets for much of the calendar year, as investors wrestled with potential changes to the Kingdom’s monetary policy. The economic climate that Mark Carney inherited last week was however much more upbeat than a year ago, with key PMI, consumer credit and services sector indicators showing considerable improvement. On balance, however, the reports have been a mixed bag, with Q1 GDP advancing a mere 0.3 percent.

Capital Economics released its forecast for UK growth on Monday, defying the consensus by projecting the UK economy to grow by 2.5 percent in 2015 and 4 percent in 2016. The report indicated that growth will remain sluggish in 2014, with high unemployment likely to persist well into the growth years of 2015 and 2016. Expansion in manufacturing, construction and energy are projected to be the catalysts for growth over the next three years, with increasing investments in emerging technologies expected to bear more fruit over the same period.

The forecast places a great deal of emphasis on improving business confidence, particularly in the manufacturing and services sectors. However, business confidence has experienced a zigzag pattern since the 2008 financial recession, with repeated regional and global turmoil weighing heavily on UK business outlook. Ongoing eurozone volatility, culminating in repeated bailouts, sluggish growth and political crisis, are likely to weigh heavily on UK recovery, not to mention the impact of US Fed policy on the global markets.

Last week marked the first Monetary Policy Committee meetings under new BoE governor Mark Carney. While the decision to hold interest rates steady was no surprise, many economists take the accompanying policy statement as a sign that Carney is likely to support further quantitative easing. Carney is expected to layout his monetary action plan as early as next month. In the interim investors can anticipate a flurry of economic reports, culminating in the official Q2 growth forecast on July 25.

A strong GDP reading for Q2 will likely spur confidence in the Capital Economics report, despite the “sub-par recovery” anticipated over the next 18 months.

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