UK seen heading for fastest GDP growth since 2007

Bloomberg News survey says GDP will rise 1.3% this year and 2% in 2014, compared with predictions of 1% and 1.7% previously

The UK economy is heading for its fastest expansion since the onset of the financial crisis, economists said as they upgraded their forecasts for growth through 2015. GDP will rise 1.3 per cent this year and 2 per cent in 2014, compared with predictions of 1 per cent and 1.7 per cent previously, according to the median of 48 economists in a monthly survey by Bloomberg News. That pace of growth for next year would be the fastest since 2007, before the start of a slump that has left output more than 3 per cent below its peak.

For Bank of England Governor Mark Carney, the question is how quickly this recovery can lower the country's unemployment rate after he introduced forward guidance last month and linked the jobless rate directly to the policy stance. That measure hasn't yet been effective, according to more than two thirds of economists in a separate survey.

"The consensus forecast has moved a long way very, very quickly," said Jens Larsen, an economist at RBC Capital Markets in London and a former BoE official.

"If you get a very powerful recovery, the arguments for guidance, for the extended period of low rates, just look so much weaker. It's a bit of a communication challenge."

The economists in the Bloomberg survey see GDP growth accelerating to 2.4 percent in 2015. Consumer spending will rise 1.6 percent this year and in 2014, while exports will increase 1.8 percent and 4.7 percent.

Guidance Framework
Under its so-called forward guidance, the nine-member Monetary Policy Committee has said it won't consider raising the benchmark interest rate from a record-low 0.5 percent until unemployment falls to 7 percent, which they don't see happening until late 2016.

That projection is being challenged by recent data, and economists are more optimistic, with 19 of 31 forecasting that it will fall below the threshold before 2016.

Data this week showed the unemployment rate fell to 7.7 percent in the three months through July from 7.8 percent in the second quarter. The labor-market report also showed that jobless claims in the past two months have fallen by the most since 1997.

Figures released today showed U.K. construction output climbed at its fastest pace in three months in July, boosted by private housing, infrastructure and commercial work. Construction, which accounts for 6.3 percent of the economy, rose 2.2 percent from June and was 2 percent higher than a year earlier, the report showed.

Difference of Opinion
BOE policy makers say productivity will pick up as the economy recovers, meaning companies will get more output from their existing workers, which will limit the pace of hiring. Carney said yesterday that a difference of opinion between the central bank and other forecasters is "natural."

"The market had a more positive view of the rate at which unemployment will come down and a more pessimistic view of productivity," he said at a hearing of the Treasury Committee, a panel of lawmakers that scrutinizes the BOE.

Economists' more positive outlook for the U.K. follows economic growth of 0.7 percent in the three months through June as well as a continued strengthening of services and manufacturing this quarter.

Property-Price Gains
Recent signs of recovery have also boosted confidence in the housing market. A report by Acadametrics Ltd. today showed house prices rose to a record last month as government measures boosted demand and London's property market continued to surge.

The Royal Institution of Chartered Surveyors today called for the central bank's Financial Policy Committee to limit annual property price increases to 5 percent to prevent another bubble.

Even after recent improvements in the economy, two thirds of economists in the Bloomberg survey said the economy is still not at what Carney has termed "escape velocity." The survey was conducted from Sept. 6 to Sept. 11.

In tandem with the pickup, gilt yields have risen and investors have increased bets on an interest-rate increase before 2016. Twenty-three of 33 economists surveyed by Bloomberg said guidance hasn't yet been effective.

For Ross Walker, an economist at Royal Bank of Scotland Group Plc, Carney's testimony to lawmakers yesterday failed to provide the clarity required.

Transparency Challenge
"For a policy framework designed to bring greater transparency and enhance understanding of the MPC's reaction function, a distinct sense of haziness pervaded the hearing," he said. "The BOE's core problem remains that it is difficult to provide greater transparency via forward guidance when there is a divided -- seemingly increasingly divided -- MPC."

Carney has said his message is aimed at consumers and executives as much as investors, as they are the ones who will ultimately drive the economy.

"It needs to be supplemented by the common understanding of policy, not just in financial markets, but by businesses and households," he said yesterday. "A given stance of policy that is better understood by people who make spending and investment decisions in the economy is more effective."