• UK economy set to grow by 0.8% this year – the lowest rate since 2009.
• Economy set to speed up only marginally in 2018 and 2019 with growth of 1.1% and 1.8% respectively.
• Due to a sharp rise in inflation real wages will fall, thereby limiting consumer spending growth.
• Business investment is expected to suffer as Brexit-related uncertainty hurts confidence.
• There are reasons for cautious optimism, however. While we believe the labour market is past its peak, the unemployment rate is still set to average just 5.3% over 2017. This compares to an average of 6.6% in the 2006-2016 period.
• The weak pound will discourage imports, lending support to domestic producers.
• Bank of England to keep rates on hold until at least mid-2018.

New forecasts by leading economics consultancy Cebr – the Centre for Economics and Business Research – show that the UK economy will grow by just 0.8% in 2017 – the slowest rate of growth since the recession of 2009.

 

This forecast, part of the consultancy’s UK Prospects publication, sees growth stand at less than half 2016’s anticipated 1.8%. A weakened consumer economy and dampened business investment intentions will be behind the slowdown. Cebr expects inflation to stand at 2.7% over 2017 – almost four times its 2016 level – driven by higher import costs and rising oil prices. In combination with lacklustre wage growth, this will bring an end to the consumer spending boom which has been driving economic growth over the past few years.

 

An early indication of retailers feeling the squeeze was seen over the holiday period. While online orders appear to have been strong, some retailers witnessed a disappointing performance compared to last year and many discounted heavily in the weeks before Christmas in an attempt to attract shoppers.

 

On the business side of the economy, many firms will take a ‘wait and see’ approach as Brexit negotiations unfold, leading to a 3.9% decline in business investment in 2017.

 

The labour market, on the other hand, paints a slightly brighter picture. Although a decrease in employment and a rise in the Claimant Count lead Cebr to believe that the labour market may be past its peak, it will hold up well by historic standards. While we expect the unemployment rate to rise to 5.3% in 2017, this is still below 2015 and 2014 levels.

 

Further decent news come from trade prospects. The weaker pound discourages imports, while making those UK exports which compete primarily on price more attractive to foreign buyers. However, Cebr believes that a more substantial exports boost may still be some way away given that at present relatively few British goods and services compete primarily on price and a shift towards such exports will take time.

 

Given the many unknowns surrounding Article 50 negotiations, Cebr acknowledges that there are significant bands of uncertainty around its central growth projections.

 

Nina Skero, Managing Economist at Cebr, says, “In 2017, new challenges such as rising inflation will combine with existing ones including weak wage and productivity growth to make for a difficult year.

 

“A simultaneous consumer and business investment slowdown will leave the economy without two key growth drivers, but there are some reasons for cautious optimism. Although the labour market is set to soften, by historic standards the unemployment rate will remain low. Additionally, the weaker pound is discouraging imports thereby supporting domestic producers.“