Skip to main content
  • Register
  • Help
  • Contact us
  • Log out of your HL account
Investment Times

Goldilocks economy to continue in 2015

| 24 December 2014 | A A A
Goldilocks economy to continue in 2015

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Like the Little Bear's porridge, the UK economy could prove to be just the right temperature in 2015.

The Office for Budgetary Responsibility (OBR) expects the economy to grow by a steady, if unspectacular, 2.4% next year, and unemployment to fall further to 5.4%, far lower than most of Europe, Germany excepted. Inflation is expected to come in at just 1.2%, and remain below the Bank of England's target until 2017.

Public finances continue to disappoint

Now for the bad news. Productivity growth remains weak, and without growth in productivity it is hard to see real wages rising significantly.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

The pressure on household budgets therefore looks set to continue, though the falling oil price could provide a boost if the effect filters through to the petrol pumps.

The government's finances also look less than rosy. The OBR note that the areas of the economy which outperformed expectations in 2014 are those which yield the least tax revenue. As a result the amount of tax raised per £1 of economic activity has fallen, so despite economic growth, the budget deficit is expected to fall by only £6.3bn this year to £91.3bn.

Headwinds

The UK economy and the US (currently growing at an annualised pace of 3.7%) look to be the bright spots in an increasingly gloomy global picture. The euro zone's continued stagnation, the recession in Japan, and a slowdown in China represent significant headwinds to the UK economy.

However, perhaps the biggest risk comes from within. Uncertainty over the outcome of May's election, particularly in the event of a hung parliament, could delay business investment and hamper economic growth.

The silver lining

This 'goldilocks' combination of steady growth without inflationary pressure should allow the Bank of England to provide continued support to the economy via ultra-low interest rates - at present I feel an interest rate rise looks unlikely in 2015. While this is clearly bad news for savers, it should be positive for both stock and bond markets, and therefore should be welcomed by investors in these asset classes.

Meanwhile recent changes to stamp duty could ensure the property market remains buoyant too.

IMF forecast growth rates

Source: IMF October 2014

As the chart shows, Chinese growth is expected to slow further over the next four years. However, this is to be expected as the economy makes the transition from an export-led model to one of domestic consumption, and growth rates of 6-7% are still well in excess of developed world peers.

Euro zone and Japanese growth are expected to remain muted for the next few years, while the UK and US are expected to perform respectably, albeit below their pre-crisis trend.

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.