In reply to Gordon Stainforth:
Growth will slow markedly in 2017, household incomes will be squeezed by higher inflation and businesses will hold back on investment decisions because of uncertainty about Brexit, according to the majority of economists in an annual Financial Times survey.
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The UK is thought to have been one of the fastest-growing advanced economies in 2016. Growth remained resilient in the immediate aftermath of the vote to leave the EU.
But most of the 122 economists who responded now expected growth to slow — from about 2.1 per cent in 2016 to no more than 1.5 per cent in 2017.
The depreciation of sterling is set to lead to higher inflation, while wages are expected to rise more slowly. Many economists think unemployment will rise as businesses try to restrain costs in the face of uncertainty about the UK’s future outside the EU, which is also expected to depress business investment.
Most economists predict these pressures will hold back consumer spending, the engine of economic growth in the UK in recent years.
“We think the uncertain reality will hit home [in 2017], with a fall in investment and slowdown in consumption as inflation erodes real wages,” said Liz Martins, UK economist at HSBC.
“Once inflation rises and real wage growth slows considerably, the key driver of growth in the UK economy will be highly constrained,” said Noble Francis, economics director of the Construction Products Association.
Of the economists who responded, 45 per cent said they expected a marked slowdown in growth in 2017 to somewhere between 1.1 and 1.5 per cent. A further 19 per cent expected a more significant slowdown. Only 3 per cent thought growth would be faster in 2017 than in 2016 and 7 per cent thought growth would be the same or only fractionally slower.
Many of those who said they expected growth to be the same or higher than in 2016 were also in the small minority of economists who thought Brexit would have positive long-term effects for the UK economy. But not all take a positive view of both the short and longer-term outlook.
“UK growth will continue to surprise on the upside in 2017,” said Marian Bell, a former member of the Bank of England’s Monetary Policy Committee. “The economy is still benefiting from pre-referendum monetary stimulus, boosted by precautionary post-referendum policy loosening and the concomitant fall in sterling, while the impact of Brexit itself has not yet been seen.”
Although there are a number of factors likely to weigh on growth this year, there are also some that will provide a greater stimulus than in 2016. In particular, noted Linda Yueh, adjunct professor of economics at the London Business School, “a slower pace of fiscal austerity and a weaker pound”.
The weaker currency should provide a boost to exporters. But David Miles, another former member of the MPC and professor of economics at Imperial College London, said that “the negative impact of higher prices on disposable incomes is likely to be somewhat stronger than the positive impact of a lower value of sterling” on export demand.
Costas Milas, professor of finance at the University of Liverpool, also pointed out that the considerable volatility in the exchange rate since the Brexit vote created problems for exporters: “This is a challenge for exporters because it creates uncertainty for their earnings and future investments even if firms manage to partly hedge against exchange rate risk.”
Many economists are finding it particularly difficult to forecast growth this year. “I view the current global economic environment as the most uncertain in modern history,” said Ethan Ilzetzki, a lecturer at the London School of Economics.
“The uncertainty range in forecasts of economic growth is so large that it is perfectly possible and not too unlikely that UK growth actually speeds up [in 2017],” said Ricardo Reis, professor of economics at the LSE, whose central estimate for economic growth was for a “modest slowdown”.
Some of these uncertainties are global. “There is particular uncertainty about the outlook for China, continental Europe and the USA,” said Tim Besley, another former member of the Bank of England Monetary Policy Committee and professor of economics at the LSE.
Risks in mainland Europe include political uncertainty on the forthcoming French and German elections, continued high levels of migration and instability in the Italian banking sector.
Domestic risks focus on uncertainty about how the Brexit negotiations will progress. But there is also risk in the potential for further strike action and the difficulty of predicting how UK labour productivity, which has consistently disappointed forecasters in recent years, will develop.
“There is more downside risk . . . than upward risk,” concluded Wouter Den Haan, a professor of economics at the LSE. “If the current growth rate is repeated in 2017 then that would be quite nice.”
Full responses
Anonymous
I expect growth at around 1 per cent in 2017. Business investment is likely to slow, reflecting the Brexit induced uncertainty. Household consumption growth will weaken reflecting declining real disposable income growth and weaker credit growth. Fiscal policy will provide only a modest impulse. Offsetting that, global growth now looks strong.
Anonymous
To around 1 per cent for the year as a whole, with the bulk of the slowdown coming in the second half. This assumes Article 50 is triggered by end-March 2017 and that it becomes apparent by April-May 2017 that a pretty hard Brexit is likely. At that point FDI [foreign direct investment] into the UK and capital expenditure in the UK will take a hit, and immigration into the UK from the EU27 will fall.
Howard Archer, chief European and UK economist, IHS Global Insight
Despite the current resilience, 2017 is likely to be an increasingly difficult year for the UK economy. Indeed, we expect GDP growth to slow markedly to 1.3 per cent in 2017 (from an estimated 2.1 per cent in 2016) — as consumer fundamentals weaken markedly and uncertainty is heightened by the government triggering Article 50 to formally start the UK’s exit from the EU.
Consumers are highly likely to face markedly diminishing purchasing power as 2017 progresses as inflation rises appreciably and earnings growth is limited by companies striving to limit their costs. In addition, unemployment seems likely to rise over the coming months, despite the recent resilience of the labour market.
Businesses will probably be cautious over investment and employment, and their uncertainty is seen heightened when the government triggers Article 50 of the Lisbon treaty and negotiations over the UK’s future relationship with the EU come to the forefront, particularly regarding immigration, trade and access to the single market. Additionally, a substantially weakened pound is increasing companies’ costs by lifting prices for imported oil, commodities and components.
On the positive side, a markedly weaker pound should support UK exports, although we suspect lacklustre growth in the eurozone will limit the upside. Eurozone growth is seen being pressurised in 2017 by heightened political uncertainty across the region.
Post edited at 20:00