Sunny outlook for economy but we need to keep spending

The National Institute for Economic and Social Research has revised up its economic forecast but warns the economy is still vulnerable.

by Gabriella Griffith
Last Updated: 06 Aug 2013
Thunder clouds may be gathering over the UK today but according to the latest reports, our economic outlook is sunny.

The National Institute of Economic and Social Research (NIESR) has revised up its forecasts for both 2013 and 2014. The macroeconomic think tank estimates the economy will grow 1.2% this year – double what the Office for Budget Responsibility estimated back in March – and 1.8% next year.

According to NIESR we’ve been hitting the shops harder than previously thought - it put the optimism down to a ‘rise in the prospects for consumer spending growth…at the expense of household saving'.

Yes - saving has gone out of the window for many of us, which might be bad for us in the long term, but it's proving extremely good for the economy. NIESR found saving had dropped from 6.7% of total income, to 4.2% and it expects it to fall even further to 3%.

But the good news comes with a warning: growth could face a setback if those saving rates go up.

‘One potential risk is that these low saving rates are not sustained,’ said NIESR in the report.

‘In any case, while consumer spending growth is necessary, a balanced recovery will require a significant contribution from net trade and [business investment]. We see relatively little sign of this as yet.’

The purchasing managers index (PMI) also brought good news yesterday.  Markit's index rose to its highest level in over two years during July, to 54.6 (a reading above 50 indicates growth). The report showed demand was up across the board with good demand from domestic orders as well as exports coupled with healthy job growth.

Also, personal insolvencies have dropped 6% on last year, according to the latest figures from Insolvency Service released this morning.

But unfortunately it’s not all sunshine and lollipops. A study by Money Advice Service has found more than half of UK adults are struggling to meet bills. The report questioned 5,000 people about their personal finances and 52% admitted they are struggling to pay their bills and debt repayments.

The research found people are planning ahead less and not putting as much money aside (as we already know from NIESR).

‘We recognise that times are still tough for families, but Britain is holding its nerve, we are sticking to our plan and the British economy is on the mend,’ said a spokesman for the UK Treasury.

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