Ernst & Young forecasts average UK earnings to increase faster than inflation rate

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London based multinational professional services firm EY (Ernst & Young) released its EY ITEM Club Spring forecast 2014 on Monday, which predicts that UK earnings will increase by 1.7%, while inflation rates are expected to remain low at 1.6%.

After six years of decreases in real wages for UK workers, rises in earnings will in turn increase consumer spending, while commodity prices could fall due to a slowdown in the emerging markets. EY forecasts that growth will exceed inflation on a sustained basis. Lower inflation and a stronger pound could result in the Monetary Policy Committee (MPC) keeping interest rates on hold at 0.5% until the third quarter of 2015, when rates will rise very gradually.

According to EY’s quarterly economic report, the UK will see growth of 2.9% in 2014, with favourable labour market factors creating a demand for labour which could result in skills shortages in certain sectors. The forecast estimates that the employment rate in the UK for people aged 16 to 64 will increase from 71.2% in 2013, to 73.7% in 2017. This could meet the aim of Chancellor of the Exchequer to put the UK at the top of the G7 table, which Germany topped last year at 73.3%. EY anticipates that the UK’s labour supply will rise by a further 700,000 over the next two years as a result of immigration, older workers working for longer and Government reforms to move people from welfare into the workforce.

The unemployment rate is also predicted to continue falling, down from the current 7.1% to 6.5% by the end of the 2014 and dropping to 6% by the end of 2015.

EY’s report also estimates that the UK housing market will be more restrained, with prices cooling as a result of caution by lenders, tighter lending criteria and an increase in house building, which will prevent an unsustainable boom. House prices are forecast to rise by 7.4% this year and 7.2% in 2015, falling back to 4.2% in 2016 when the mortgage guarantee scheme ends.

Growth in business investment, which helps productivity and supports real wage growth, is expected to reach 9.1% in 2014, boosted by the low cost of capital, high levels of cash in company accounts and increasing confidence in boardrooms. Business investment is forecast to rise by 8.3% in 2015 with growth rates of approximately 7% by 2016. Opportunities for exporters will also increase, with growth in export volumes expected to rise by 5.3% this year, followed by 5.9% in 2015.

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