UK growth forecast upgraded amid warning over inflation

Leading economic thinktank the NIESR expects 1.7% growth this year but says Brexit will hit trade in the long term.

Source: theguardian.com, 2016 

01/02/2017, news




The surprising resilience of consumer spending in the months since the Brexit vote has forced one of the UK’s leading economic thinktanks to revise up its growth forecasts for the second time since the referendum.

In its quarterly health check of the economy, the National Institute for Economic and Social Research (NIESR) said it now expected growth of 1.7% this year – only slightly down on the 2% recorded in 2016.

It predicted that only the US – at 2.1% – would have faster growth among the G7 major industrialised nations than the UK this year. Next year, Britain is expected to grow by 1.9%, behind the US and Canada at 2.2%, but above Japan, Germany, France and Italy.

NIESR, along with most other forecasters, had expected a more rapid slowdown in the economy after the vote on 23 June to leave the EU, and in its first post-Brexit report in August 2016 predicted that growth would be 1% in 2017.

The thinktank revised its 2017 forecast up to 1.4% in November after official figures showed the economy bouncing back rapidly from the immediate shock of the referendum. Following a second quarterly 0.6% expansion in output, the thinktank said it was upgrading its estimate for a second time.

NIESR said it remained convinced that the economy would slow this year as higher inflation reduced consumer spending power.

“We expect the composition of growth to rebalance towards net trade, as the headwinds facing households from the erosion of their real incomes weigh on consumer spending while the depreciation of sterling supports net trade,” said Simon Kirby, NIESR’s head of macroeconomic forecasting.

Kirby added that even after the latest upgrade, UK growth in the current year would still be slower than the 2.7% that had been pencilled in for 2017 before the Brexit vote. He said he expected inflation to peak at close to 4% by late 2017.

NIESR’s new forecast comes ahead of the Bank of England’s quarterly inflation report tomorrow, which will also include a growth upgrade for 2017.

The thinktank said its economic modelling showed that the benefits of the free-trade deals the government hopes to sign with the US, Canada and leading emerging economies would be dwarfed by the damage caused to exports of both goods and services to the EU.

Monique Ebell, an NIESR research fellow, said that even if the UK succeeded in its objective of striking a bespoke deal with its former EU partners, trade would still fall by 22% over time. By contrast, free trade deals with the so-called Brics – Brazil, Russia, India and China – would increase trade by 2.2% and similar deals with Anglo-Saxon countries such as the US, Canada, Australia and New Zealand would boost trade by 2.6%.

Ebell said it would take time for the impact of changing trade patterns to be felt, but predicted that after 15 years the economy would be just over 2% smaller than if it stayed in the EU.

Spending on essentials jumps as inflation bites

 

The NIESR report comes amid fresh signs that households are having to spend a growing chunk of their monthly budgets on essentials such as food and fuel, which will fan fears that consumer spending is set to slow this year.

Against the backdrop of rising inflation, spending on groceries grew at its fastest pace since mid-2013 in December, jumping by 2.9% from a year earlier, according to a monthly report into household outlays by Lloyds Bank.

Overall, spending on essentials rose for the fourth month running in December, up by 1.8%.

Spending on petrol and diesel, which had declined consecutively for almost three years until rising in September 2016, rose sharply by 9% year-on-year in December. That was the biggest year-on-year increase since the bank started compiling its spending report in February 2013.

The bank also found further evidence that households were growing more worried about rising prices as the weak pound makes imports to the UK more expensive and that gets passed on to consumers. In Lloyds’s latest consumer survey, conducted with pollsters Ipsos Mori, the percentage of people with a negative view of inflation rose to 51% in December compared with 49% in November.

More than half of the 2,000 account holders polled, or 56%, said they planned to cut back on non-essential spending in January.

Robin Bulloch, managing director at Lloyds Bank, said: “The surge in essential spending over the last few months shows no sign of abating. With a majority of people expressing concern around current levels of inflation, it’s no surprise that most consumers plan to cut back on luxury items. A squeeze on household budgets now looks ever more certain as we move through 2017.”

Source: theguardian.com, 2016 

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