The sharp fall in oil prices will boost Britain’s economic growth this year, but weakness in the eurozone will limit momentum, said the National Institute of Economic and Social Research.
The thinktank has revised up its outlook for the UK economy this year and now sees GDP growing 2.9%, compared with a previous estimate of 2.5% last November.
“This is almost entirely due to the sharp fall in the oil price. Not only does this boost consumer spending … it also improves the UK’s trade balance,” the institute said in its latest forecast.
But as fears intensified about the fallout from a tense standoff over Greece’s debt repayments, the thinktank added a note of caution.
“The weakness of the global economy – and in particular the euro area, by far the UK’s largest trading partner – remains a hindrance to a significant improvement.”
Oil prices have halved, with benchmark Brent crude falling from a peak of $115 last summer to around $58 a barrel now.
But looking further ahead beyond 2015, the thinktank predicted the fillip to the economy would wear off.
“We expect growth to moderate in 2016 and beyond, as the positive impact of the oil price shock dissipates and domestic demand growth softens. Offsetting this is a strengthening global economy that should support the recovery in the growth of exports,” it said.
The thinktank expects inflation to remain below the Bank of England’s target of 2% for some time and does not expect policymakers to raise interest rates before the beginning of next year.
It also expects a real-terms boost to wages thanks to low inflation but warns the longer-term picture for Britain’s workers may not be so bright. Productivity growth, which in the UK has lagged other advanced economies, remains “the most significant domestic risk to the UK’s economic outlook”, the institute said.
“If the recent poor productivity performance is a structural rather than a cyclical phenomenon, as assumed, then this would have serious implications for future standards of living as well as economic policy,” it added.
A separate report from the British Retail Consortium has highlighted that widespread discounting continued to drive high street sales last month.
The industry group said sales increased by an annual 0.2% on a like-for-like basis after having fallen an annual 0.4% in the crucial Christmas month.
BRC director general Helen Dickinson said: “Customers were offered attractive bargains on winter ranges but it remains to be seen at what cost to the retailers’ margins.”
Less volatile figures covering the last three months showed sales were also up an annual 0.2%, the fastest underlying growth since the start of last summer.
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