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Last year (2006) the UK economy grew by 2.7%. This healthy level of GDP growth was driven by strong consumer spending, higher levels of investment by businesses, and stronger overseas demand for UK goods and services. The best performing part of the UK economy continues to be the services sector. Even so, UK manufacturing recovered some impetus in 2006.

The general economic outlook is for continuing healthy levels of growth, despite the inflationary pressure that was revealed in the March 2007 data. Consumer spending seems likely to grow moderately. A further interest rate rise in May 2007 would complete a 1% rise since August 2006.

Whilst this can be expected to take the heat out of spending, there are reasons to believe that spending will continue. Apart from heavily indebted households, which are likely to have to cut back on their spending plans, many individuals face a boost to their disposable incomes in the near future. This is because energy prices are falling and likely to carry on doing so for some time.

In 2006, the price charged for gas and electricity rose at a fast pace. But this year, these prices are likely to go into reverse. Energy companies such as British Gas and EDP have already announced price cuts and these can be expected to continue. Fuel bills are one of the household costs which are most visible - being paid monthly or quarterly.

Fluctuations in energy prices are vital in deciding household expenditure - after all, we like to keep warm in winter! Copyright: Laszlo Bacsi, from stock.xchng.

Falling energy prices will boost household incomes and spending as a result. As the impact of lower fuel bills feeds into the inflation data, the CPI will rise more slowly, reducing the pressure on the MPC to raise the interest rate.

In terms of business spending, recent surveys suggest that capital investment will remain strong in the next few months. Businesses have undoubtedly been hit by higher energy bills, as have households. But capital goods' prices have fallen in recent months and company finances overall are in good shape.

Production, especially in labour-intensive industries, has continued to be moved to low-cost centres. The beneficiaries of this investment have been eastern Europe and south and south-east Asia. UK industry has made a switch to high value-added manufacturing and technology spending has remained high.

Overall, the UK economy seems set for a continuation of the healthy growth seen in the recent period. This means a positive outlook for employment, investment and government tax revenues.

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