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The U.K. is set to be the fastest growing economy among the world's seven leading industrialized nations this year, according to a leading economic think tank, who predicts the country would move from recovery into expansion in 2014.
The U.K.-based EY ITEM Club, a forecasting group of non-government economists, predicts the country's economy could expand by 3.1 percent this year, up from an estimate of 2.9 percent back in May. This compares to 2 percent for Canada and 1.8 percent for Germany, it said.
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"The U.K. economy has hit the sweet spot," Peter Spencer, a chief economic adviser at the organization said in a press release on Monday. Business investment has bolstered an economy that has been previously reliant on consumer spending, he said, adding that a strong labor market has also "underpinned" the return to growth.
"What a difference a year makes. Last summer, any growth looked better than no growth and the outlook remained uncertain. But, confidence has now returned and economic uncertainty has dropped well down the worry list," Spencer added.
Various metrics in the U.K. have shown a promising upturn since the start of 2013 and have seen little signs of abating. U.K. inflation rose much faster than expected in June, in stark contrast to its neighbors in Europe that are dealing with weak growth in consumer prices. The unemployment rate fell to 6.5 percent from March to May and the U.K. has received praise from the likes of the International Monetary Fund and the Organisation for Economic Co-operation and Development.
Sterling has also continued a seemingly never-ending rise, recently pushing above 1.70 against the dollar, with the Bank of England expected to be one of the first central banks in the developed world to raise its benchmark interest rate. Skeptics have warned that the U.K. recovery has been built on debt, with consumers taking out loans or dipping into savings to enjoy the lives they became accustomed to before the financial crisis. However, EY ITEM Club is adamant that the economy has become more balanced.
"Increasing M&A (merger and acquisition) values suggest that there is scope for momentum to build. With large cash piles and stock market sentiment tilting towards growth, we may see a scramble to invest driven by FOMO (Fear Of Missing Out)," Mark Gregory, EY's chief economist said.
But if workers are expecting their wages to rise along with the healthy expansion then they might be in for a shock. Official data last week showed earnings excluding bonuses rose by an annual 0.7 percent in the three months through May, and the EY Club predicts that further growth in earnings could be "steady rather than spectacular."
Consumption in the U.K. will be financed by low inflation, low interest rates and more people entering the labor market, the club said, rather than any wage growth. It predicts that real incomes—which include the effects of inflation—will grow at 1.8 percent in 2014 and 2.2 percent in 2016.
Also on Monday, the International Monetary Fund upped its 2014 growth forecast for Germany to 1.9 percent from 1.7 percent.