Budget sparks optimism says S&W’s Lawlor

The subtext to George Osborne’s budget this week is one of “sheer relief” that the economy is getting better, according to analysis by Philip Lawlor, chief investment strategist at Smith & Williamson.

Using data from the Economist he showed that each consensus forecast for 2014 UK growth was getting better, with the Bank of England now pencilling in 3.4%.

There is psychology at play, he says. The same charts in 2012 and 2013 showed that analysts started the year with optimism and steadily downgraded their forecasts.

At the same time, inflation forecasts and employment numbers were looking good. While the recovery was centred on London and the south east of England, there are now signs that it is broadening out.

However, the recovery is fragile and Mr Lawlor says this will affect how the Bank of England manages monetary policy. The Bank will be keen to anchor growth over tackling inflation.

Mr Lawlor says that interest rate rises will be later in 2015 than the newspapers are currently predicting and suggests that the key indicator will be upward pressure on wages.

While unemployment has fallen, he says there is still lots of slack in the economy, with the move from part time to full time work likely to be the focus rather than wage rises.