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UK economic update

The UK economic recovery continues to gather pace, triggering a slew of upgrades to growth forecasts for this year. The International Monetary Fund raised its forecast for the UK’s economic expansion during 2014 from 2.5% to 2.9%. Meanwhile, the Organisation for Economic Co-operation & Development upgraded its 2014 forecast to 3.2%. In comparison, the Bank of England maintained its 2014 forecast at 3.4% although it increased its projection for next year from 2.7% to 2.9%.

The UK’s rate of unemployment declined to 6.8% during the three months to March, compared with a rate of 7.8% a year earlier. In sharp contrast to its earlier prediction the rate of unemployment was likely to remain above 7% for some time, the Bank of England now expects the unemployment rate to fall to 5.9% by mid-2016. Elsewhere, a study undertaken by Markit and KPMG revealed “strong” demand for staff and a shortage of skilled labour that is helping to drive up salaries for permanent positions at their fastest rate since July 2007.

The Bank of England believes the UK economy “has started to head back towards normal” – economic output has recovered and is close to regaining its pre-crisis level and there is still considerable spare capacity. Nevertheless, many commentators remain concerned an increase in interest rates could derail the recovery. The UK base rate has remained at an all-time low of 0.5% since March 2009 and, although the economy has “edged closer” to the point at which interest rates would need to rise, the Bank of England expects rates to remain low “for some time”. Nevertheless, the Confederation of British Industry has tipped interest rates to rise during the first quarter of 2015, compared with its previous prediction of an increase in the third quarter.

The rate of inflation, as measured by the Consumer Prices Index rose from 1.6% during March to 1.8% during April, reversing nine months of decline. The UK’s trade deficit narrowed during March, helped by a 4.9% increase in exports. Export orders and sales have risen to all-time highs, according a report from the British Chambers of Commerce, and 40% of UK exporting companies intend to expand their workforce during the next quarter, suggesting confidence is on the rise. Over 70% of firms anticipate an increase in turnover while 62% believe their profitability will increase this year.

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