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UK emerging a winner from oil price collapse: EY

The UK economy is emerging a winner from the oil price collapse, with consultancy EY now expecting GDP growth of 2.9 per cent in 2015, up 0.5 per cent on its October forecast.

Cheaper energy will have wide-ranging effects on the UK economy, giving the consumer a shot in the arm and driving inflation as measured by the Consumer Prices Index down to an average of zero this year, according to Peter Spencer, chief economic adviser at the EY Item Club.

The upward revision in its growth forecast means an acceleration from last year’s estimated growth of 2.6 per cent, also revised up to 2.9 per cent for next year.

With inflation averaging zero in 2015, this will effectively put any increase in base rates on hold until next spring, stated the group.

Mr Spencer commented that the negatives in this apparently glowing scenario are largely risks that might arise, rather than existing factors holding back the economy.

He said: “The plunging oil price itself partly reflects a lack of demand in the global economy, and worries over the Eurozone are intensifying.

“Also, this year’s consumer-led growth will leave the UK economy even more unbalanced and dependent on domestic consumption – at a time when political uncertainty is mounting ahead of the general election and a possible EU referendum.”

This boost comes at a particularly opportune time, as the UK economy was beginning to lose momentum, while the housing market also slowed at the end of last year, with mortgage and housing transactions and house price inflation well down on the high rates seen six months ago.

According to EY, much now depends upon how low energy prices go – and for how long.

The forecast stated this could be a flash in the pan like 2009, when prices fell briefly to $40 a barrel, but EY believes that this fall will last longer.

Mr Spencer said: “Saudi Arabia has regained control of the market, and will want to remind investors in alternatives that oil prices can go down as well as up – and stay down for a worryingly long time.

“However, we are not expecting another prolonged era of cheap energy like the late 1980s and 1990s, and we’re assuming that Brent will be back at US$75 a barrel by 2018.”

As for UK inflation, EY predicted it will actually turn negative for a few months during the first half of 2015, before moving back up in the final quarter to average about zero per cent over the year as a whole.

As for property, the mortgage and housing market slowdown was partly due to expectations of rising interest rates, which are now likely to be less of a worry, the consultancy forecasted.

Mr Spencer said: “Real incomes are a major driver of the housing market and will provide renewed momentum this year, and scrapping the annuity requirement for defined contribution pension schemes could free up funds for retirees to invest in buy-to-let.

“We expect transactions to pick up again but house price inflation to remain close to 5 per cent.”

While prospects have brightened for the UK, the global economy has slowed and prospects for the Eurozone appear to be going from bad to worse. “The euro has fallen to an all-time low against the dollar, which will help combat deflation and stimulate Eurozone exports at the expense of UK producers.”

Risks were also identified as stemming from the uncertainty of the UK general election, followed by the possibility of a referendum on UK membership of the EU.

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