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[LONDON] Britain's economy is on track for its strongest growth in nearly a decade in 2015 as the plunge in world oil prices puts money in the pockets of the country's free-spending consumers, a leading economic think tank said on Tuesday.
Growth will rise to 2.9 per cent - its fastest pace since 2006 - from 2.6 per cent last year, the National Institute of Economic and Social Research said, a welcome prospect for Prime Minister David Cameron who faces a national election on May 7.
As recently as November, NIESR predicted growth of 2.5 per cent this year, but that was before oil prices tumbled.
Simon Kirby, an economist at the think tank, said the boost from lower fuel costs would eventually fade, but would help power growth in consumer spending in 2015 to 3.5 per cent.
Britain's strong economic recovery since mid-2013 has been driven by consumer spending which has offset the drag from the nearly stagnant economies in the euro zone. "Our forecast for the next two years is still really a story of domestic demand growth," Kirby told reporters.
A fall in inflation - which is expected to show prices falling in the next few months - has helped offset slow wage growth.
NIESR expected the unemployment rate to fall to 5.2 per cent by the end of 2015, down from its most recent reading of 5.8 per cent and taking it back to its levels before the financial crisis. "But beyond this, it is the performance of productivity that is key to real wage growth and it remains the most significant domestic risk to the UK's economic outlook," it said.
NIESR said the Bank of England would probably start to raise interest rates in February next year, earlier than market predictions for mid-2016.
The BoE has kept rates at 0.5 per cent for nearly six years and NIESR said it could keep them unchanged for longer than it currently forecasts if the fall in inflation snuffs out a recovery in pay deals, something that has not yet occurred.
The think tank also said the different policies of Britain's three main political parties would make only a marginal difference to growth over the next five years, while the risks from outside the country were potentially much bigger. "Clearly a serious downturn in the euro area would dwarf any difference between the fiscal stances of whoever is elected," Kirby said.