UK economic growth strong but slowing

The combination of inflation falling to zero and an upturn in earnings growth has led to a surge in real disposable income. At the same time, unemployment has continued to fall and consumer confidence has held at record highs. The consequent fall in the savings rate has added to the strength of consumer demand. 

In 2016, earnings growth should rise a little further but the inflation increase should outpace it. Real income should continue to grow but at a slower pace than in 2015. The result should be a cooling of consumer demand growth from 2.9% in 2015 to 2.2% in 2016.

Overall demand conditions remain favourable, permitting business investment to continue to grow at more than 5% p.a. The big swing should be in residential investment. Housing construction surged from Q2 13 to Q1 14 but has faltered since then. The underlying conditions for housing remain strong, and with supply bottlenecks easing, construction should gradually recover. 

"After weak 2015 residential investment growth of 2.6%, we predict a strong acceleration to 7% in 2016", says Societe Generale. 

The weak areas of the economy in 2016 should be net trade and government consumption, which should suffer from the launch of the next phase of austerity. The overall result should be a cooling of GDP growth from 2.4% to 2.0% in 2016.