UK economy to grow strongly in 2016 despite global slowdown, EY says

Growth in house prices, bigger demand for exports and an increase in the average household budget will boost Britain's economy and UK businesses in 2016, research published on 18 January showed.

According to economists at Ernst & Young's Item Club (EY), Britain's economy will grow 2.6% this year, compared with 2.2% over the past 12 months, despite the turmoil that has seen global markets suffer a disappointing start to 2016.

However, EY economists believe both the economic environment in both the eurozone and the US will improve over the course of the year, which should stabilise the dollar and the euro and would in turn lead to an increased demand for British exports.

The government's decision to introduce a new national living wage of £7.20 per hour will result in a "big increase in disposable incomes", EY added, indicating that, alongside low inflation and low interest rates, was expected to boost consumer spending, which is forecast to grow 2.8% this year.

"Consumers had a welcome holiday from inflation and austerity in 2015, and, until recently, this had looked set to come to an end," said Peter Spencer, chief economist at EY Item Club.

"Inflation will start to pick up towards the end of 2016, while the impact of the government's welfare savings will increasingly be felt.

"This will eat into spending power and cause consumer spending growth to slow."

The report added house prices were expected to rise by 6.5% this year, with the chronic shortage of available properties showing no signs of relenting.

"Levels of housebuilding remain well short of what would be needed to satisfy demographic changes," EY said.

However, the threat posed by a global slowdown threatens to hamper Britain's economic growth, EY warned, adding it expects the UK's gross domestic product to grow by 2.3% in 2017 and by 2.2% in the following 12 months.

Meanwhile, a separate survey carried out by the Confederation of British Industry and accountancy firm PwC showed 45% of financial services firms reported an increase in business levels in the three months to December, while 30% of companies expect activity to increase over the next 12 months.

"Ongoing low interest rates, costs of floods claims, the continuing slump in oil prices and the domino effect of stock market volatility are responsible for the increased pessimism," said Kevin Burrows, financial services leader at PwC.