The fall in oil prices is acting like an energy pill to the British economy, according to new research released by the National Institute of Economic and Social Research (NIESR).
Oil prices have halved since last summer, when Brent peaked at about $US115 a barrel. It is now trading around $US58.
The researchers are now confident that UK GDP will grow by almost 3% in 2015, and had revised upwards their forecasts for this year.
“This is almost entirely due to the sharp fall in the oil price. This both boosts consumer spending, now forecast to increase by almost 3.5% in 2015, and improves the UK’s trade balance,” the research says.
Unemployment should also fall this year, dropping to about 5.2% by the end of this year.
At the same time, general weakness in the global economy and a more specific uncertainty around the future of the Eurozone, by far the UK’s largest trading partner, could trigger further troubles next year.
According to NIESR, growth is expected to slow down “in 2016 and beyond, as the positive impact of the oil price shock dissipates, and domestic demand growth softens.”
Moreover, real wages and consumer spending will be boosted in the near future thanks, once again, to the fall of oil prices.
But, beyond this short push the outcome remains grim.
The researchers have spotted productivity, defined as the amount of goods and services produced by one hour of labour, as the biggest long term risk for the UK economy.
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.
Here is a chart:
Consumer price index (CPI) measures the average prices of a basket of consumer goods and services, such as transportation, food and medical care. The percentage change is calculated fourth quarter on fourth quarter. GDP and National Income are calculated as percentage change year on year, while the unemployment rate is calculated at the end of each year.
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