Item Club predicts UK economic growth of 2.8% this year

Low inflation and stronger eurozone growth should help the UK economy expand 2.8% this year despite political uncertainty ahead of the election, according to an EY Item Club report.

It said low inflation was adding to the benefits of higher employment and the positive effects of lower oil prices.

Item Club chief economic adviser Peter Spencer said the financial markets seem prepared for further Greek problems.

But potential headwinds were a weak government and EU referendum, he said.

The forecast growth is slightly down on the 2.9% expansion that the Item Club previously predicted, due to official fourth-quarter GDP figures coming in weaker than expected.

The Item Club forecasts growth in 2016 of 3%, up from 2.9% estimated previously.

Inflation has fallen to zero in recent months and, along with improvements in employment, is boosting consumer confidence, the Item Club's spring forecast said.

The report said an added bonus was coming from recovery in the eurozone, helped by the European Central Bank's €1.1 trillion (£790bn) asset purchase stimulus programme.

The euro bloc's recovery should offset a hit to overseas trade from the strength of the pound, the Item Club said.

Mr Spencer said: "The economy is taking the general election in its stride as 'noflation' trumps politics. The eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016.

"This is a mirror image of what we saw in 2010-12, when unemployment and inflation were high and Europe was in the doldrums.

Not 'plain sailing'

"If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post 7 May should be strong enough to outweigh the effects of any political uncertainty."

The report expects the eurozone recovery to boost trade - with UK exports predicted to rise by 5.9% this year and 4.9% in 2016. But Mr Spencer added: "However, it's not all plain sailing and possible risks around a weak government and an EU referendum remain.

"In Europe, the Greek tragedy has yet to reach a denouement, although European banks and investors seem prepared for a disorderly outcome.

"But worries about Ukraine and Russia have eased and we are confident that the UK economy would not falter from any of these shocks," he said.