UK growth to slow to 1.5% in 2018, leading economists predict

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The UK’s economy will slow further in 2018 as business investment remains on hold, interest rates creep up and indebted consumers curb their spending, according to more than 100 leading economists.


The majority of economists who took part in the Financial Times annual predictions survey agreed that inflation would start to recede this year, after last year correctly forecasting it would rise sharply. However, after wrongly predicting that interest rates would remain frozen in 2017, economists believe there will be a further 0.5 percentage point rise this year.

The UK was one of the fastest growing advanced economies in 2016 but dropped below all other G7 economies in 2017 and is expected to remain towards the back of the pack this year, with Japan and Italy.


Just over half of the 111 economists who responded to the survey expect growth to be no more than 1.5 per cent in 2018.

In November, the Office for Budget Responsibility forecast 1.5 per cent growth for 2017, although this could eventually be raised slightly by recent revisions to the official statistics, and 1.4 per cent for 2018.


“The UK is expected to lag behind most of the rest of Europe as well as other developed economies in 2018,” said Dawn Holland, the head of the global economic monitoring unit at the UN. “While globally conditions for investment have started to improve, business investment in the UK seems to be grinding to a halt.”

Brexit will continue to preoccupy the country as the UK and the EU move on to the second phase of negotiating a transition period after Britain leaves the bloc and a future trade relationship.

“Much depends on how . . . the Brexit negotiations are perceived to be going,” said Bronwyn Curtis, chairman of JPMorgan Asian Investment Trust.

The majority of economists surveyed were not reassured by the progress of the Brexit talks in 2017. While the two sides made significant progress last year, many economists fear that a deadline of March 2019 will prove too tight.

The survey was conducted between December 8 and 26, with most answers being submitted after the EU27 judged that sufficient progress had been made to move on to the second phase of Brexit talks.

Nearly four-fifths of respondents said they felt no more optimistic, or actually more pessimistic, about the UK’s longer-term economic prospects outside the EU than they did last year.

Many respondents were reassured that the compromises made by the government to conclude a withdrawal agreement make an adequate transition period more likely and a “no deal” outcome less likely.

“As the UK’s dreams of sealing advantageous international trade deals outside the EU come up against the hard reality of the Irish border, a beneficial continued close trading relationship with the EU becomes more likely,” said Marian Bell of Alpha Economics, a former member of the Monetary Policy Committee.

But many remain concerned by the slow rate of progress. “Time is very short for doing a final trade deal,” said Liz Martins of HSBC. “On the one hand you could argue this points to the UK drifting towards a very soft Norway-style Brexit, but on the other you could say there is still a significant risk of a cliff edge in 2021.”

Many highlighted the manner in which the UK side was negotiating as a reason for becoming more pessimistic.

One economist described them as an “embarrassing mess” while another said “the incompetence” with which they were being handled may make the cost to the economy even larger.

“There seems no end in sight to the policy uncertainty, and hence the likely drip of reduced investment, relocations, and loss of skilled migrant workers,” said Diane Coyle, professor of economics at Manchester University.

Nevertheless, there has been little impact on business investment so far since the UK voted to leave the EU in June 2016.

Official figures show that capital spending by businesses was 1.7 per cent higher in the third quarter of 2017 compared with a year earlier — roughly the same pace of growth as during the two years before the vote.


But many respondents to the survey, such as Daniel Vernazza of UniCredit bank, said that ”Brexit-related uncertainty is likely to weigh more heavily on the UK economy in 2018 than in 2017” because companies will begin to put their contingency plans into effect.

A dissenting minority forecast that the move to the second phase of negotiations would mean a lower level of uncertainty about the future that could unlock more spending.

Nick Bosanquet, a professor of economics at Imperial College in London, said that aside from any Brexit effect, the ability of businesses to invest is being hit by increases in the minimum wage, a levy to pay for apprenticeships, rising pension costs and higher business rates.

“Many medium-sized companies will face [a] 10 per cent rise in labour costs — this will slow [the] labour market,” he said.

Trade will be a bright spot, with some economists forecasting that stronger global growth and the continuing weakness of the pound will help to improve the UK’s trade balance in 2018.

Net trade has made little contribution to growth since the EU referendum. While export volumes have risen substantially, they have been matched by import growth as the domestic economy did not slow as fast as expected.

“The depreciation of the pound has been something of a ‘double edged sword’ as many firms who export also import,” said Suren Thiru, head of economics at the British Chambers of Commerce.

“While the outlook for UK exporters is for modest growth, import growth is likely to remain solid, with little evidence that consumers or firms are switching away from imports towards domestic alternatives despite their rising cost,” he said.

Inflation is expected to fall back, although it will remain above the Bank of England’s 2 per cent target, but economists said this would offer only moderate relief to households which have been squeezed by prices rising faster than incomes.

Wages will only rise slightly, respondents to the poll predicted, and rising interest rates and high levels of household debts mean consumers will be thinking more about how to save than on what to splurge.

The economists who responded to the survey were divided over the future path of interest rates. The majority of respondents were split evenly between predicting one or two further 0.25 percentage point increases this year.

But a significant minority thought the BoE would either keep rates on hold or raise them three or more times.

“Lower levels of growth in the UK reflect a reduction in the growth of capacity, reflecting insufficient investment and [weaker future] trade [links],” said Jagjit Chadha, director of the National Institute of Economic and Social Research. This kind of “negative supply shock”, which has also led to a depreciation of sterling and thus higher inflation, is — he added — a central bank’s “worst nightmare”.

Source: Financial Time




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