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.
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.”
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.
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.
Angus Armstrong, director of macroeconomics, National Institute of Economic and Social Research
I expect growth down to around 1.5 per cent next year or even lower. It may feel worse as purchasing power is likely to be unchanged. The main reasons are growth in real consumption is likely to be weaker due to higher inflation and investment growth will remain slow.
Melanie Baker and Jacob Nell, UK economists, Morgan Stanley
We expect growth to halve from 2 per cent in 2016 to 1 per cent in 2017 in a “slowburn slowdown”. We expect Brexit-related uncertainty — especially the likelihood of increased barriers to trade — to crimp business investment and hiring. Higher inflation should help subdue consumer spending growth, eroding the consumer resilience that has kept the UK expanding at trend since the referendum. But we expect policy support and an improvement in the trade balance, led by sterling weakness, to keep growth positive. This economy looks resilient enough to avoid recession.
Nicholas Barr, professor of public economics, London School of Economics
Growth will slow but it’s not clear how fast. I’m not a macro expert, but the current situation has been presented to me as like Roadrunner — running like crazy until realising that there is nothing underneath, at which point collapse.
Ray Barrell, emeritus professor, Brunel Unversity, National Institute of Economic and Social Research
GDP growth may well slow by more than half a percentage point in 2017 as compared with 2016. Higher oil prices will be slowing growth, and uncertainty over the future relationship with the EU will more than offset the potential gains from the fall in sterling since the referendum in June. The fall in sterling may in part be a structural one as a response to an anticipated fall in inward migration, and hence it should have little impact on output.
David Bell, professor of economics, University of Stirling
I would expect some slowing down of growth in 2017. Two factors will contribute to this: (1) declining real wages caused by a combination of price inflation and continued weakness in wage growth and (2) weakness in investment intentions due to uncertainties associated with Brexit and world geopolitical developments. These effects will be only slightly offset by improvements in net trade.
Marian Bell, former MPC member
UK growth will continue to surprise on the upside in 2017. 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. Any slowdown that does occur in 2017, as Brexit plans become clearer, will be modest and skewed to the end of the year.
Andrew Benito, senior European economist, Goldman Sachs
We expect annual growth to slow from 2.1 per cent in 2016 to 1.4 per cent in 2017 as policy uncertainty weighs on business investment into next year and a deterioration in the terms of trade weakens growth of real consumer spending. Yet, these effects are cushioned, and overall GDP growth does not weaken by that much, as policy-related shock-absorbers (weaker sterling, easier monetary and fiscal policy) offset the direct effects on activity of the decision to leave the EU.
Tim Besley, professor of economics and political science, London School of Economics
My point estimate is for modest slowing. But this is based on the assumption that there are no significant external shocks. There is particular uncertainty about the outlook for China, continental Europe and the US. Worst case, it could be a bumpy ride. But, absent that, I expect the resilience shown so far following the June vote will continue.
David Blanchflower, Bruce V. Rauner professor, Dartmouth College
My expectation is that growth will slow to below 1 per cent. Big issues are what progress is made in Brexit discussions. The extent of a US fiscal stimulus will matter.
Nick Bosanquet, emeritus professor of health policy, Imperial College
OBR forecast of 1.4 per cent reasonable. Drag on consumption from inflation, household debt and rising tax payments. Investment affected both by Brexit worries and by long term fall in investment in the UK by FTSE 100 companies — now mostly offshore.
Big risk is about London — Brexit turns financial services jitters into air tickets to Dublin — and falling housing market. Thousands already with negative equity in inner boroughs — London’s dark secret.
Ryan Bourne, former head of public policy, Institute of Economic Affairs
I expect a mild slowdown, after all the Bloom evidence on the effects of uncertainty on growth is pretty compelling, but this past year has surely shown us that for the UK post-Brexit this effect is unlikely to be strong. Growth will continue fairly uninterrupted at around 2 per cent per annum.
Francis Breedon, professor of economics and finance, Queen Mary University London
not much slowing — seems that the ‘expectations’ effects of Brexit is small or non- existent
Alan Budd, former head of the Office for Budget Responsibility,
I expect a slowdown to about 1-1.5 % mainly because of slower consumption growth in response to lower growth of real incomes.
Frances Cairncross, chair of court, Heriot-Watt University
It may slow very little. Even with the fall in sterling, inflation may not rise much — and interest rates may also increase only slowly. The American expansion will also be a favourable force next year.
Jagjit Chadha, director, NIESR
Given the referendum result and the ongoing uncertainties about the structure of trade and other relations out of the EU, I would expect growth to be some 0.5% or more lower in 2017 compared to 2016. There are risks of a worse outcome given the event risk of triggering Article 50 and possibly from a diverging Euro Area.
Alan Clarke, head of European fixed income strategy, Scotiabank
I expect UK GDP growth to slow from 2.1% y/y during 2016, down to 1.5% y/y on average during 2017. You can look at this two ways. A growth rate of 1.5% y/y is the same pace that we expect for Germany and the eurozone in 2017. It would also match the pace of US GDP during 2016. So while it is a little slower than the UK grew in 2016, it isn’t that slow and is far better than feared in the initial aftermath of the referendum. However, if you scratch beneath the surface and look at the quarterly growth rates, we expect a low-point of 0.2% q/q by the end of the year, with real disposable income growth crushed. The point is, the annual average growth rate disguises a more sinister undertone.
David Cobham, professor of economics, Heriot-Watt University
Significantly, but not necessarily to below zero, as investment falls and exports fail to plug the gap.
Diane Coyle, professor of economics, University of Manchester
It will be somewhat slower, mainly because of the effect of uncertainty on investment and the reduction in real income growth as inflation rises.
Bronwyn Curtis, from the, Society of Business Economists
It will slow by from 2.1% in 2016 to between 1.1% and 1.6% in 2017. It is a wide range because so much depends on how quickly, and by how much, real wages are eroded and if credit conditions tighten. I’m expecting sterling to drop another 5-10% on a trade weighted basis, but if there are some nasty political surprises in Europe, the UK may look like a ‘safe haven’ despite the uncertainties limiting the devaluation. Business investment will take a hit but it may not happen until the cost to companies of Brexit becomes a reality.
Howard Davies, chairman, Royal Bank of Scotland
I expect growth at around 1.5%
Paul De Grauwe, professor, London School of Economics
I expect UK economic growth to slow in 2017. The main reason is that the UK is heading towards a hard Brexit. This will create negative “animal spirits” about the long term growth prospects of the UK with negative impact on investment and consumption
Panicos Demetriades, professor of financial economics, University of Leicester and former governor of the Central Bank of Cyprus,
Brexit related uncertainty will continue to weigh heavily on U.K. Economic growth. A lot of investment will be put on hold as investors exercise their option to wait and see. We may even see companies exiting as they relocate elsewhere in Europe or scaling down their presence here.
Wouter Den Haan, professor, London School of Economics
There is more downward risk (Brexit, strikes, inflation, wage pressure, Trump negatively affecting world trade and share values, migration crisis, Eurozone instability) then upward risk (Trump’s fiscal policy generating a bit of a boom, the recovery from the financial crisis finally becoming more robust). So if the current growth rate is repeated in 2017 then that would be quite nice.
Michael Dicks, chief economist, Wadhwani Asset Management
The slowdown that the consensus is expecting — from 2.0% to 1.3% — looks too severe.
With the US set to benefit from fiscal easing; the euro-area already moving up a gear; and Japan to gain from the fall in the yen, global growth looks set to strengthen — helping the UK in the process, especially with sterling so low.
If the government works towards a “soft” Brexit, as makes good sense and as appears to be gaining ground within government, then firms may be less aggressive in curtailing investment.
A risk is that households could begin to wake up to the hit that Brexit entails to their living standards — and chop back their spending. But there is scant evidence as yet that this is happening. Accordingly, it may only dawn on people gradually, leading to a mild, rather than a sharp, deceleration in private consumption.
Perhaps growth at around a 1¾% pace is the most likely outcome.
Peter Dixon, Commerzbank
Relative to the expected 2016 outcome, I reckon we will lose around 0.6 percentage points of growth as it slows to 1.4%. Relative to my pre-referendum expectation, this represents a slowdown of 0.8pp. I still look for a large part of the slowdown to come from investment as Brexit-related uncertainty starts to bite. However, the deal with Nissan may be the first indication that government is serious about providing guarantees to strategically important industries, which prevents the worst case outcome from materialising. But with inflation picking up, it’s likely that the squeeze on real incomes will take the edge off real income growth, and that slower consumption will also contribute to the slowdown.
Kevin Dowd, professor of finance and economics, Durham University
I expect a deterioration in economic growth in 2017 due to an escalation of the banking/economic/political crisis in Europe, the prospect of recession in the US and an economic slowdown in China.
Charles Dumas, chief economist, TS Lombard
Down to 1½%, assuming BoE tightens policy in a full employment economy with a devaluation ‘shock’
Jan Eeckhout, professor of economics, University College London
Half a percentage point. It is mainly driven by the uncertainty generated from the Brexit deal. If the Brexit deal is similar to the Norwegian deal, I expect little long run effects.
Martin Ellison, professor of economics, University of Oxford
It’s all about uncertainty going into 2017, full of even more unknown unknowns than was 2016 which was a bumper year for economic uncertainty. This can only have a negative impact on UK economic growth, as companies exercise the option value of waiting for some of the uncertainty to dissipate. There will be some eye-catching stories, such as we saw in 2016 with Nissan and the return of McDonald’s European headquarters, but “one swallow does not make a summer” and bad news for economic growth is likely to dominate in the aggregate. What is presented as good news may also ultimately turn out not to be, for example if the price of guarantees given to Nissan turns out to be a long queue of other groups demanding concessions to protect their special interests. The most ardent supporters of Brexit accepted that there will be transitional costs — we should expect to start paying them in 2017.
Stephanie Flanders, chief market strategist for Europe, J P Morgan Asset Management
I would expect the economy to slow significantly by the summer as consumers feel the effect of higher inflation and investment and net exports are not able to fill the gap.
Noble Francis, economics director, Construction Products Association
We expect GDP growth to slow to 1.4% in 2017 and 1.2% in 2018, primarily due to the impacts of the depreciation in Sterling, raising the cost of imported products, UK manufactured goods that use imported materials and lagged behind fuel/energy costs (that are often hedged against). Despite low unemployment, nominal wage growth has been poor (2.3%) and, consequently, real wage growth, and consumer spending, has only been sustained by low inflation. Once inflation rises and real wage growth slows considerably, the key driver of growth in the UK economy will be highly constrained.
John Gieve, chair, Nesta
I expect it to fall back by at least 1% from 2016 as the uncertainties of Brexit become clearer and firms start to hedge their bets and the falling £ squeezes consumption.
I tend to accept the consensus that growth will slow in 2017 to about 1%, from about 2% in 2016. Business investment will slow down because of Brexit uncertainties. If wages rise more because of faster inflation, consumption will slow less, but interest rates will have to be increased by more than otherwise. If wages do not rise faster in line with inflation, consumption will get held back.
Andrew Goodwin, lead UK economist, Oxford Economics
In terms of calendar year averages we don’t expect much of a slowdown — maybe from 2% to 1.5%. But that’s largely an arithmetic issue — in terms of quarterly growth rates we expect to move from around 0.5% a quarter to 0.2-0.3% a quarter. This is largely because we will no longer be able to rely on the consumer to drive growth given the headwinds from higher inflation and a weaker labour market. The weaker pound may mean that the UK’s trade performance is less poor than it has been, but overall it is difficult to see how we can sustain the recent growth rates without the consumer playing a leading role.
Stuart Green, UK chief economist, Santander
We look for headline GDP growth to roughly half in 2017, towards a 1.1% rate from an estimated 2.0% expansion in 2016. Softer business investment expenditure is expected to feature, but the key to growth next year, in our view, relates to the reaction of consumers to the looming acceleration of inflation. We look for a slowdown of real household income growth to develop next year, which although not as severe as that experienced in 2010-12, may still be sufficient to lower consumption growth towards a 1.5% rate from the likely 3% pace in 2016. However, for an economy facing up to its largest institutional change for several decades, GDP growth in the region of 1.1% next year, if realised, need not be viewed as a failure.
Rebecca Harding, chief economist, British Bankers’ Association
I expect economic growth to slow by around 1% in 2017. This is predominantly because of economic uncertainty which will hold back investment. While inflation is likely to increase, with the prospective dampening effect on consumer demand, it is political and economic uncertainty that is driving my view of 2017.
Rupert Harrison, chief macro-strategist, BlackRock
I think we will see a slowing along the lines of the Bank’s latest forecasts, largely due to the growing impact of uncertainty on business investment and the labour market. Inflation will probably hit consumer spending at the margin, especially as spending growth has been unsustainably strong lately. A big determinant of the growth impact of Brexit next year will be at what point we get any visibility on a transition deal. Reliable early signals in Q1 or Q2 about transition would pose an upside risk for growth in my view as investment location decisions will be postponed. Equally, if it became clear that a transition deal was very unlikely or would only be put in place at the last minute then that would pose a downside risk for growth.
Jonathan Haskel, professor of economics, Imperial College Business School, Imperial College London
I’d expect it to slow a bit, but only a bit. The exchange rate shock would likely feed a bit into real incomes and perhaps slow consumption.
John Hawksworth, chief economist, PwC
We expect UK growth to slow from around 2% in 2016 to around 1-1.5% in 2017. This reflects the dampening effect of Brexit-related uncertainty on UK business investment, the housing market and job creation, although the speed with which these effects come through itself remains highly uncertain. We would also expect some dampening of consumer spending growth due to the impact of the weaker pound on consumer prices, which will lead to a renewed squeeze on real wage growth in 2017.
Sarah Hewin, chief European economist, Standard Chartered
I expect growth to slow to 1.2% next year — it’s true that we haven’t seen any Brexit impact on the UK economy so far, but the difficulties associated with leaving the EU and likely dislocation to trade and supply chains will probably become more apparent once negotiations start. Triggering Article 50 will also be the starting gun for businesses to activate contingency plans for relocating vulnerable parts of their businesses and winding back on some planned investment.
Brian Hilliard, chief UK economist, Société Générale
We expect growth to fall to 1.4%. The economy has proved amazingly resilient to the Brexit uncertainty shock. However, we expect that, once Article 50 is triggered, the initial hardline response of the EU27 negotiating team will provide a wake-up call which will hurt both consumer and business confidence.
Martin Hutchinson, columnist, The Bear’s Lair
Not at all; the decline in sterling will accelerate it.
Ethan Ilzetzki, lecturer in economics, London School of Economics and Centre for Macroeconomics
I view the current global economic environment as the most uncertain in modern history. In these conditions it is very difficult to make growth forecasts. The best point estimate is economic growth in 2017 will be the same as in 2016, but the uncertainty (both upside and downside) around this estimate is enormous.
Richard Jeffrey, chief economist, Cazenove Capital Management
While there is a widespread expectation that the economy will slow markedly in 2017, I think fears of a Brexit-induced slowdown have been overplayed. I anticipate growth at a similar pace to that seen in 2016. Household spending has maintained good momentum and is likely to remain the key driver. At the same time, modestly improved trade flows should compensate for weaker business investment. My major concern at the moment is the poor trend in productivity. If this does not improve towards the longer-term trend of 2%, then a tightening labour market will act as a growing constraint on growth beyond 2017.
Oliver Jones, economist, Fathom Consulting
We expect growth in the UK to slow from 2.0% in 2016 to 0.8% in 2017. The UK has initially held up better than expected following the vote to leave the European Union in the summer, but the impact on investment following a shock of this nature typically takes six-to-nine months to begin to feed through in earnest. As investment begins to fall, job insecurity and unemployment will rise, feeding through to consumption in a way that has not occurred thus far.
Dhaval Joshi, chief strategist, BCA Research
Economists are notoriously bad at making predictions at the best of times. 2017 will be even harder to get right because Brexit creates a larger number of moving parts, complex interactions and feedback loops, both negative and positive. Forced to make a prediction, I would say that growth might slow to about 1%. The combined headwinds of higher prices for real consumer spending, Brexit uncertainty for investment, and the recent spike in long-term interest rates for credit growth will be stronger than the tailwind of a weaker pound on exports.
DeAnne Julius, former member of the MPC
I expect growth to slow moderately (to 1.5-2%) after growing above its sustainable rate in 2016.
David Kern, consultant economist, Kern Consulting
I expect UK GDP to grow by 1.8% in 2017, slightly slower than in 2016 but much stronger than the current consensus predicts. There will be a modest slowdown in the first half of 2017, but growth will recover in the second half of the year. Household consumption and net exports (which will benefit from the weaker pound) will be the main growth drivers in 2017, but I expect a temporary deceleration in business investment
Stephen King, group chief economist, HSBC Investment Bank
Real incomes are likely to be squeezed thanks to a rise in headline inflation stemming from the impact of sterling’s fall in pushing import prices higher. As a result, growth may slow from 2.1 per cent in 2016 to 1.2 per cent in 2017.
James Knightley, senior economist, ING
We think the 2017 growth rate of the economy will be half the rate of 2016 (1.1% versus 2.1%). Business surveys, such as the Bank of England’s Agents’ Summary and Deloitte’s CFO survey point to a marked slowdown in hiring and investment intentions and we may already be seeing this in the jobs numbers. After Article 50 is triggered this uncertainty will increase, particularly with a tough political backdrop in Europe where several elections are scheduled. This could prompt an intensification in the war of words between the UK and EU officials. Given the likelihood of a pretty toxic political environment we could see more businesses sitting on their hands.
At the same time rising inflation will be eating into household spending power. Unfortunately wages are unlikely to respond given the caution being expressed within business surveys. This means that we could see a return of newspaper headlines warning of a “cost of living crisis”, which runs the risk of further eroding confidence and weaker consumer spending.
Ruth Lea, economic adviser, Arbuthnot Banking Group
I expect GDP growth to be around 1½% to 2%, much as it would have been if there had been no Brexit vote. Granted business may be a tad hesitant to invest, given the “uncertainty” over Brexit, but there is always “uncertainty” and investment has held up well so far. Granted, too, that higher inflation will squeeze real incomes (assuming annual earnings growth remains at around 2½%), putting downward pressure on household consumption growth. But, on the other hand, the weaker pound should help exports & the Bank’s monetary easing package should stimulate domestic activity (albeit modestly). With continuing recovery in the Eurozone (albeit sluggish) and arguably better prospects in the US, the prospects for our major trading partners look OK, which should help sustain exports.
John Llewellyn, partner, Llewellyn Consulting
Significant slowing for two primary reasons: squeeze on real incomes from higher (sterling) import prices; and a tempering of investment spending as a result of Brexit uncertainties.
Jonathan Loynes, chief economist, Capital Economics
We expect UK growth to slow only modestly to 1.5% in 2017 as the positive effects of the lower pound on exports and policy support help to offset the squeeze on household incomes from higher inflation.
Gerard Lyons, chief economic strategist, Netwealth Investments
I think UK growth will be just over 2% in 2017. I have revised up my forecast in recent weeks. Before the Referendum I felt that if the country voted to Leave, then the pound and interest rates would fall and the economy would grow solidly through the rest of the year. That has happened. Also I forecast the economy would lose some momentum in 2017 because of the uncertainty associated with leaving the EU. Since then, helped by Trump’s victory and a greater focus on reflationary policies across the globe, the international outlook looks stronger than before, while the UK economy has been resilient since the referendum.
That being said, there are challenges for the UK. At this stage of the cycle, after seven years of growth, the economy often slows. The biggest danger is that we talk ourselves into a self-feeding downturn, curbing spending and investment plans. Also the economy remains vulnerable to shocks.
Stephen Machin, professor of economics, London School of Economics
It seems likely to that growth will be a fair bit slower than pre-Brexit referendum forecasts, mostly because the prospects of productivity and/or real wage growth do not look very promising.
Chris Martin, professor, University of Bath
slow by about 100-150 points; but this is highly uncertain. I am confident that Brexit will be very bad for the economy in the medium term; I am not at all confident about how things will evolve in the shorter term.
Liz Martins, UK economist, HSBC
We see growth slowing from 2.1% to 1.2%. This is less of a slowdown than we had previously been predicting (to 0.7%), but the upward revision is not a reflection of a more optimistic outlook. Rather it reflects the momentum and higher base from H2 2016, which has been much stronger than we expected. We don’t think it is as case of not being out of the woods yet, so much as not really having entered the woods yet. We think the uncertain reality will hit home next year, with a fall in investment and slowdown in consumption as inflation erodes real wages.
Mariana Mazzucato, professor in the economics of innovation, University of Sussex
UK growth remains consumption driven not investment driven. As real incomes are stagnating, this consumption is being driven by debt: so private debt/disposable income is as high as it was before the crisis began. This is very worrying. I believe that Brexit will only worsen that. Businesses invest when they see a market opportunity. Brexit reduces the size of the market (demand), and also the public investments that the UK has profited from, via Horizon, ERC and the European Investment Bank. So private investment is likely to stagnate or fall further.
Andrew McPhillips, chief economist, YBS Group
We expect growth to slow to somewhere in the 1% to 1.5% range next year as the uncertainty surrounding Brexit negotiations comes into sharper focus. As the talks progress there will inevitably be much media speculation around the terms the government is managing to negotiate. Any negative trend in this could lead to businesses delaying investment decisions and subsequently reducing growth.
David Meenagh, lecturer, Cardiff University/Liverpool Research Group in Macroeconomics
We expect growth to improve next year as the policy uncertainty over Brexit ends.
Heal Mehta, senior European economist, Legal & General Investment Management
Growth will slow a bit, from 0.5%q/q in 3Q16 to a low point to around 0.2% q/q in the first half of 2017. The last time the economy was growing at a similar pace was during the European sovereign debt crisis in 2011-2012. The drop in sterling since the referendum will feed into higher inflation and eat into real incomes and slow down the UK’s engine of growth — consumption. I also expect investment data to weaken in line with the business investment intentions surveys — so far the actual investment data has held up well but firms are giving a clear signal that this will be scaled back. The extent to which a weaker pound can boost exports is limited, as the UK’s exports have a high degree of import content, so this removes some of the competitive advantage.
Costas Milas, professor of finance, University of Liverpool
“I expect UK growth to slow down to around 1.5%. Why? Daily growth of the £ effective exchange rate has witnessed a surge in volatility since the Referendum. In fact, the volatility of the daily growth in the exchange rate has more than doubled from 0.42% pre-Referendum (1990-mid 2016) to almost
1% afterwards! 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 risks. With this in mind, (exporting) companies will delay their investment plans which, in turn, will slow down our economy.
Notice, however, that if Trump implements loose fiscal policy, US growth will pick up. This will benefit the global economy and our growth (see also my answer to 7.), hence pushing UK growth above 1.5%.”
David Miles, professor of economics, Imperial College, London
Probably by a bit since 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, at least in the near term.
Patrick Minford, professor of applied economics, Cardiff Business School
The Cardiff/Liverpool forecasting group (I am replying on behalf of the group including David Meenagh to whom you wrote and who co-operates with me in creating the forecast from our various models) does not expect a slowdown but rather that growth will continue in the 2-3% corridor of 2016. The reasons are that a) the Brexit long run effect should be positive due to the opening up of free trade globally and the return of regulation to the UK from the EU, while we expect migration control to be exerted on unskilled labour where taxpayer costs are high, leaving skilled labour lin its current liberal regime. b) ‘uncertainty’ is mild, since it spans a range from a status quo ‘soft’ Brexit to a ‘clean’ Brexit with effects as in a)- uncertainty therefore about the upside. We think there will be sectoral differences with manufacturing under pressure while traded services are encouraged by the resource allocation effects of eliminating EU protection of agriculture and manufacturing.
Allan Monks, global market strategist, JPMorgan
I expect annual GDP growth to slow to 1.3% next year. Household real labour income looks set to slow to a crawl. Past wealth gains and ongoing resilience in the housing market may help some households to absorb part of the real income shock, but will not prevent a slowing in overall spending growth. Consumer confidence is particularly sensitive to inflation trends. And I estimate that a rise in the CPI to nearly 3% will take consumer sentiment back to 2012 levels. I expect a decline in business investment as a belated response to higher political uncertainty, with fiscal policy shaving around half a percentage point off growth in 2017. I expect limited growth support from the weaker currency via net trade. UK exporters have for some time tended to take a weaker currency as a chance to rebuild profits margins rather than expand market share. And with so much uncertainty about the UK’s future trading relationship, these profits are unlikely to translate into stronger investment spending very quickly.
Fabrice Montagne, chief UK and senior European economist, Barclays
We expect UK GDP to grow 1% next year and 1.5% in 2018. Much of that slow down owes to lower investment in the short term, but in the course of 2017, lower consumption is expected to be the main driver of the slowdown. We believe households are ill prepared to face a slowdown. The recovery in wages has been disappointing and temporary sources of income increase (PPI, pension reform,…) are set to dry out. Despite low unemployment rates we don’t see wages accelerate as much as inflation, even though minimum wage or labour scarcity in some sector may generate some upside pressure.
Kathrin Muehlbronner, sovereign risk group, Moody’s Investor’s Service Ltd
We do expect the UK economy to slow down significantly in 2017. Our baseline forecast is for 1% growth, roughly half of the growth rate registered in 2016. We believe that uncertainty over the UK’s new trade deal with the EU will finally be visible in growth numbers and in particular in much lower investment. Households will become more cautious too, given higher inflation and the resultant loss in purchasing power and a stalling labour market.
John Muellbauer, professor, Nuffield College and Institute for New Economic Thinking at the Oxford Martin School
I expect a slowing of around 2 percentage points of 2017 GDP growth from 2016. This comes mainly from a fall in real wages by midyear, the result of higher prices, and negative business sentiment. Buoyant consumer spending in advance of higher prices will tend to reverse when higher prices materialise.
Rain Newton-Smith, chief economist, CBI
We expect growth to slow significantly next year, to 1.3% — compared to our pre-referendum forecast of 2.0%. Main drivers: · We expect weaker business investment, as uncertainty bears down on plans for capital spending: this reflect both weaker investment intentions in our business surveys and anecdote from CBI members. Though we expect a bit of strength in business investment over the near-term, as the pipeline of pre-referendum spending projects feeds through. · A faster rise in inflation will eat into households’ real incomes; we expect only a gradual rise in nominal earnings, depressed by softer economic and labour market momentum. This will bear down on household spending growth. · In contrast to softer domestic demand, we see more support from net trade (contributing a decent +0.4ppts to growth next year) as the lower pound boosts near-term exports, and weaker domestic demand weights on imports growth. But our surveys (and official data) are indicating quite starkly that the weaker exchange rate is driving up import costs, which could take the edge off this competitiveness boost. · And medium-term trade prospects will be heavily dependent on the outcome of EU negotiations.
Erik Nielsen, group chief economist, UniCredit
By about one percentage point — to an annual average of 1.0-1.5% in 2017. Business sentiment will probably suffer when art 50 is triggered and the complexity (and little prospect for a good outcome) begins to dawn on people.
Andrew Oswald, professor of economics and behavioural science, Warwick University
That depends on Britons’ psychology over the next few months. Nothing is assured; economists have relatively little experience of what happens after a forced customs-union exit.
However, if I had to bet, it would be that there will be evidence of substantial slowing in the UK by next winter. That is based on (i) some recent signs of slowing in the rate of employment growth (despite the currently low unemployment rate itself) and (ii) conceptual reasoning from first principles. The latter goes like this.
1. Brexit + Trump + Populism across Europe have together combined to raise uncertainty. Variances have increased in probability distributions.
2. That, rationally, leads firms and consumers to defer big decisions and to cancel investment projects that were marginal.
3. Herd behaviour then takes over; spillovers follow; the trend is reinforced. Slowing Down with the Joneses then occurs in the downward direction. A spiral thereby sets in — possibly one lasting many years until certainty is restored.
David Owen, chief European financial economist, Jefferies
GDP growth likely to slow from around 2% on average in 2016 to 1.25% in 2017. Recession perhaps avoided but triggering Article 50 could quickly bring matters to a head, with the additional uncertainty created causing more companies putting investment and employment decisions on hold. Indeed the latest labour market release could have marked a turning point in this economic cycle for employment. Meanwhile real wages are set to be squeezed by a pick-up in inflation, with still little sign of any decisive increase in pay settlements, suggesting still slack in the labour market. The more interesting issue will be what happens in 2018 and 2019. One does not need to be particularly bearish to see UK GDP growth of only around 1% on average in 2018.
David Paton, professor of industrial economics, Nottingham University Business School
By slightly more than growth in the Eurozone.
Joseph Pearlman, professor of economics, City University
Uncertainty over the terms of Brexit will reduce investment, and with it, growth.
Ann Pettifor, director, Policy Research in Macroeconomics (PRIME)
We at PRIME expect growth to slow by at least 0.5% next year. Government spending growth will be stronger than in 2016, and with the exception of 2014 (ahead of the election) will be second strongest since austerity began. Business investment has been fragile for more than a year, and the London housing construction bubble is flagging. There may be a possible boost to exports from a weak £, but global demand is as limp as UK demand.
John Philpott, director, The Jobs Economist
I expect GDP growth to slow markedly to 1.2% in 2017 resulting from lower business investment and slower growth in real household incomes caused by a combination of weaker pay growth and slightly higher unemployment dampening consumer spending. An improvement in net trade due to a more competitive exchange rate will help prevent a sharper slowdown.
Kallum Pickering, senior uk economist, Berenberg Bank
The UK GDP growth rate is likely to slow to 1.5% in 2017 from c2.1% in 2016. Household consumption growth will slow as job gains slow and rising inflation squeezes real incomes. Business investment is likely to suffer modest declines as firm’s hold back on long-lived capital spending amid Brexit uncertainty. The more competitively valued exchange rate will provide a sizeable buffer through the trade balance.
Chris Pissarides, regius professor of economics, LSE
Uncertainty over Brexit will slow it down, anything between 0.5-1 percentage point. Consumer spending in China is holding up well which is a plus but negative sentiments in US, EU and especially Brexit will dominate
Ian Plenderleith, chairman, BH Macro
Quite a lot, as difficulties in negotiating new arrangements after Brexit become evident, sap confidence, discourage capital investment, increase costs, lower real wages, cost jobs and look increasingly to be taking us into a bleak dead-end.
Jonathan Portes, professor of economics and public policy, King’s College London
I would expect it to slow somewhat in the first half of the year. What happens in the second half depends very much on developments with the Brexit negotiations (as well as events in the US and elsewhere in Europe). We could see reasonable if not spectacular growth, but downside risks are large
Richard Portes, professor of economics, London Business School
Significantly, approaching 1% YoY, perhaps less. Some rise in net exports (more fall in imports than rise in exports) won’t suffice to compensate for weak capex and consumption (as inflation rises and households finally recognise real incomes are falling).
Adam Posen, president, Peterson Institute for International Economics
By 0.75-1.0 per cent (real yoy). The Brexit shock was delayed, but is coming, and net exports and cheaper real estate won’t compensate for policy uncertainty and declining investment.
Vicky Pryce, chief economic adviser, CEBR
I expect growth to slow down considerably, possibly to halve from 2016 growth rate to little over 1%. One reason is a much slower growth in consumer spending as inflation picks up, squeezing real disposable income growth. The other is a likely fall in investment due to uncertainty. Recent surveys have been indicating this cautious approach from businesses and in fact pointing to tens of billions of postponed investment. When that investment does come back, if it does, it may not be in the UK. Much of course will depend on the UK’s progress in terms of providing clarity on the future relationship with Europe which will probably be hard to do. We have already seen that any foreign direct investment announced recently has mostly (with the exception of the likes of Nissan in Sunderland and Google in London) gone into acquiring cheap UK assets made attractive due to sterling’s fall rather than in new productive investment. Increasing realisation that the Brexit trade negotiations may take many years to conclude are also affecting sentiment. Net trade is forecast by the OBR to be less of a negative contributor to growth -even move to slightly positive partly due to higher exports as a result of sterling’s depreciation. In all likelihood in the short term higher import costs will worsen the current account balance. And importing firms or those trying to pass on the rapidly rising input prices (up by over 12% in November 2016) are already suffering a squeeze from their business customers who will have difficulty passing extra costs on to the consumer- or to other businesses they supply. For the economy as a whole this will throughout 2017 be eating away at the gains that some firms may have made on final demand from abroad as a result of sterling’s fall. Expect a drop in investment and a real slowdown in consumer spending as a result of those forces.
Morten Ravn, professor of economics, University College London
I find this very hard to answer given all the uncertainties of Brexit (and Trump). We still have no clear information of what the government will ask for. I imagine a steep slowdown in growth if the government wishes to exit the internal market mainly because of the implications for the city and for corporate investment. If access to the internal market is retained, I would instead imagine a very mild slowdown if any. Trump could have an effect as well but we still know very little about the road ahead for US policy.
Ricardo Reis, professor of economics, London School of Economics
The latest forecasts from NIESR point to a modest slowdown; I have no information or insight to add to those. I must add however that 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.
David Riley, head of credit strategy, BlueBay Asset Management
Brexit related uncertainty will increasingly weigh on private investment and rising inflation will erode real incomes and consumer spending. The UK will probably avoid outright recession but growth will be barely one per cent and unemployment will drift higher.
Philip Rush, chief economist, Heteronomics
As higher inflation squeezes real incomes and uncertainty dissuades new investments while others reach completion, growth will slow. The single most likely outlook, in my view, is for the pace of growth to trough midyear at 0.1% q-o-q.
Andrew Scott, professor, London Business School
Not that much — growth to slow by around 0.5%. Uncertainty as first year of Brexit negotiations maximise political posturing and weaker European growth offset by weaker sterling and stronger US growth.
Andrew Sentance, senior economic adviser, PwC
GDP growth should be 1-1.5% in 2017 (central estimate 1.2%) after 2% this year. So not a dramatic slowdown — but weaker growth in domestic demand as a lower £ squeezes consumer spending and Brexit uncertainty holds back investment.
Philip Shaw, chief economist, Investec
Our expectation is for a modest slowdown in the pace of activity over the coming year with the primary drivers being weaker business investment and softer consumer spending growth, the latter due to a real income squeeze on the back of a lower pound. A recorded increase in business investment in Q3 was a surprise. Nonetheless we would note that there can be a lag before key spending decisions are reflected in the official data and in any case the figures are among the most heavily revised in the UK data set — early estimates can be highly unreliable.
Andrew Simms, co-director, New Weather Institute
It is time stop measuring the health of the economy using orthodox economic growth measured by fluctuations in GDP as the primary indicator. By mistaking quantity for quality of economic activity, worse than telling us nothing it can be actively misleading. It tells us nothing about the quality of employment, the intelligence of infrastructure, the economy’s resilience, the environment’s health, or the life satisfaction of the population. As the United Nations Development Programme pointed out (as far back as 1996), you may have growth, but it might be variously jobless, voiceless (denying rights), ruthless (associated with high inequality), rootless (culturally dislocating in the way that fed Brexit, for example) or futureless (as now, based on unsustainable resource use).
All of this said, I would expect the undifferentiated volume of UK economic activity not to rise significantly over the course of 2017. If anything, the opposite is more likely due to a combination of the instability resulting from the lack of clarity over Brexit, and the unknown global impact of a rise in economic nationalism in the United States under a Trump Presidency.
Don Smith, chief investment officer, Brown Shipley
The resilience of the UK economy growth to the Brexit decision has so far surprised but even with the additional support from easier monetary policy and a considerably weaker exchange rate, it is difficult not to imagine that an economy so heavily dependent on trade will not suffer greatly as a result of this major fracture with its dominant trading partner. UK GDP growth looks set to slow next year to around 1.5% as higher inflation reduces consumers’ spending power and the economy begins to feel the broader effects of weaker investment spending, but the full force of Brexit, looks likely to be felt beyond 2017. In the absence of any immediate threat to employment, ongoing uncertainties about what Brexit actually means for the UK appears to have left consumers impervious to the widespread dark threats of impending economic weakness. 2017 is unlikely to shed much light. Trade negotiations take a long time to bear fruit and, in any case, could be delayed by the distractions of the European election cycle.
Andrew Smith, chief economic adviser, Industry Forum
I expect growth to slow from around 2% in 2016 to 1% in 2017: rising price inflation will squeeze real incomes and slow consumer spending, while Brexit uncertainty will dampen investment. The main uncertainties at home are how the labour market responds: stronger wage growth would offset some of the negative impact of inflation on real incomes and spending, while a rise in unemployment would weaken growth further. Meanwhile, the effect of the lower pound on net trade may prove less beneficial than in earlier devaluations.
Peter Spencer, professor of economics, University of York
With a strong labour market and low inflation, the consumer has continued to support the economy this year. 17 million consumers voted for Brexit and they have clearly felt good about this. Exporters have also benefited from the fall in sterling. However, this optimism is unlikely to last for much longer. The labour market is weakening and inflation is picking up following the fall in sterling. Consumer-facing businesses will suffer as this happens. Overseas-facing industries will begin to wonder what will befall them over the cliff-edge in 2019. I would be surprised if GDP in Q4 2017 were significantly higher than in Q4 2016.
James Sproule, chief economist, Institute of Directors
1.5%-2.0%; so slightly below historic trend as business investment lags behind and consumers are less willing to run into further debt.
Gary Styles, director, GPS Economics
UK economic growth looks likely to be 0.5-0.75% lower in 2017 than in 2016. The prospects for the UK economy have been deteriorating in recent forecast rounds as a combination of weaker consumer spending and poor investment prospects hold back growth.
This deterioration although affected by Brexit uncertainty was well established before June 2016 referendum.
Paolo Surico, professor of economics, London Business School
I expect some weakness coming from demand driven by a combination of higher inflation, higher interest rates (possibly including the Bank rate towards the end of the year) and lower asset prices, which would squeeze household disposable income.
Silvana Tenreyro, professor of economics, London School of Economics
Around 1.5%, though of course there is a lot of uncertainty around this number as it will depend strongly on how Brexit shapes up
Suren Thiru, head of economics, British Chambers of Commerce
UK economic growth to slow to just over 1% in 2017. Higher inflation and continued uncertainty over Brexit is expected to weigh on the UK’s growth prospects with consumer spending and business investment likely to be hardest hit.
Phil Thornton, director, Clarity Economics
Growth is likely to fall to perhaps half the pace in 2016. Growth has been stronger than expected since the Brexit vote so numbers for 2016 and 2017 will be higher than expected. However a delayed fall in business investment and in consumer spending will be exacerbated by rising unemployment and falling real wages as inflation picks up, thus slower growth.
Kitty Ussher, managing director, Tooley Street Research Ltd
I see no reason why it would slow. If, as seems likely it will have grown by around 2% in 2016, I think the growth rate in 2017 will be at least as strong.
Bart van Ark, chief economist, The Conference Board
We expect the economy to slow to only 0.8 per cent GDP growth in 2017. While investment uncertainty related to Brexit may be one reason for this, our bigger concern is the weakening of the business cycle: the 6-month growth average of The Conference Board’s Leading Economic Index for the UK has now been in negative territory for half a year. In particular unemployment claims have increased since July 2016 and consumer expectation of the “general economic situation” has been negative. It seems the business cycle is quite mature and Britain is heading into a phase of slower growth and increased recession risk for 2018.
John Van Reenen, professor of economics, MIT
Slow to about 1.4%. Greater policy uncertainty over Trump, Brexit & elections in France and Germany will harm investment and hiring
Daniel Vernazza, lead UK economist, UniCredit
I expect UK economic growth to slow next year, probably to a little above 1% from around 2% in 2016, although considerable uncertainty surrounds the timing and extent of a slowdown. There are two main reasons for this. First, policy uncertainty will probably remain elevated as the UK begins arduous negotiations to exit the EU. This will probably lead businesses to defer investment and households to delay consumption. Following the Brexit vote, business investment intentions have eased and consumer confidence has fallen. Second, as the fall in the value of sterling pushes up imported and consumer prices, household real income growth will be squeezed and this will weigh on household consumption growth.
John Vickers, warden, All Souls College, Oxford
The OBR’s central estimate of GDP growth slowing to 1.4% in 2017 looks as good as any. Lots of uncertainty around it. It seems unlikely that the boost to net trade will outweigh likely weakness in consumption and investment, and supply-side fundamentals look poor.
Keith Wade, chief economist, Schroders
By just over half a per cent as inflation squeezes household incomes and spending. Business investment is likely to be weak due to the uncertainty over what Brexit actually means for the UK.
Peter Warburton, director, Economic Perspectives
Yes, to around 1%-1.5%. It would have slowed irrespective of the Brexit vote.
Martin Weale, professor, King’s College London
I expect growth of 1.7 per cent. There is obviously a lot of uncertainty surrounding Brexit, but recent experience suggests that it is easy to focus too much on uncertainty which has become something of a forecasting fad, rather than just another thing to bear in mind.
Simon Wells, chief European economist, HSBC
Growth is likely to slow from just over 2% in 2016 to just over 1% in 2017. Consumer spending growth should slow as rising inflation takes its toll on real incomes. And we still think it likely that uncertainty surrounding Brexit could weigh on business investment and employment growth.
Peter Westaway, chief European economist, Vanguard
I expect U.K. growth to fall away markedly next year, from its current 2% rate
probably to around 1%, slightly weaker than the consensus view. Like most economists, I’ve been surprised by the resilience of growth since the Brexit vote. But it seems inevitable that the ongoing uncertainty about what happens next is bound to impinge on corporate spending, hiring and investment, and consumer spending is likely to be constrained as higher inflation erodes real wages.
Matt Whittaker, chief economist, Resolution Foundation
Economic forecasting poses even more potential pitfalls than usual at the moment but, given that we can already see inflation rising and investment intentions falling, it feels inevitable that growth will come in quite a bit lower than would have been predicted ahead of the EU referendum. Much will depend on the extent to which slower growth feeds into higher unemployment rather than just slower productivity and pay growth. If consumers start to fear for their jobs — which they’re not doing at the moment — then we can expect spending to slow and apply a further brake on growth.
Mike Wickens, emeritus professor of economics, University of York
I can see no reason why UK growth should slow in 2017.
Neil Williams, group chief economist, Hermes Investment Management
UK growth to roughly halve in 2017 to about 1%yoy — reflecting Brexit uncertainty on capex plans, failure of fiscal loosening to wash through to consumer spending, deceleration in real wage growth as inflation builds and, more pervasively, fear of increased beggar-thy-neighbour policies in the US and across Europe in its highly-charged political year.
Professor Trevor Williams, visiting professor, University of Derby
Growth to slow to 1.5% or less. This will be due to the maturity of the UK recovery, thatcher have full employment and growth from increases in employment will slow whilst productivity will not increase to keep up the pace of expansion. There are already signs that the peak in employment is past. Also, higher consumer price inflation will result from the fall in pound so weakening consumer spending growth — the mainstay of the economy on the expenditure side.
Stephen Wright, professor of economics, Birkbeck, University of London
No real basis for expecting any change. UK GDP growth has very little predictability statistically, and is in any case close to its historic average. So best guess is very close to same as in 2016.
Linda Yueh, adjunct professor of economics, London Business School
I expect UK economic growth to remain fairly resilient, supported by relatively optimistic consumer confidence, a slower pace of fiscal austerity, and a weaker Pound. The UK will still be in the European Union in 2017, so there will be no fundamental change to market access to the EU Single Market. However, growth may be weaker than in 2016 if businesses defer investment decisions as a result of the continuing policy uncertainty related to Brexit.
Azad Zangana, senior European economist and strategist, Schroders Investment Management
Our forecast has a slowdown from 2.1% in 2016 to 1.4% in 2017. The main cause of the slowdown is a sharp pick-up in inflation, caused by rising energy inflation, but also the impact from the fall in sterling. Higher inflation will reduce the real disposable income of households. Usually, households could lower their savings rate, but with savings close to lows not seen since 2007, the safety buffer has been depleted. The reduced purchasing power of households will slow spending growth on goods and services, which is by far the biggest contributor to GDP growth.
I expect growth to slow a little, but not too much. There are still some bearish forecasts out there — including the European Commission’s prediction of just a 1% expansion. Given how well employment and earnings are holding up this is too pessimistic. Brexit uncertainty will weigh on investment, but on its own that isn’t enough to slow the economy to 1%. Those interested in short-term growth should watch the labour market: if employment holds near record levels and wages rise then household consumption will too. This alone should drive growth above 1%. This resilience will be something to welcome, but doesn’t really solve questions about Britain’s long-term growth model and our reliance on consumption and weakness in both investment and exports.
We expect UK GDP growth to accelerate in 2017 to 2.6 per cent. Before June Referendum we expected GDP to grow 2.25 per cent. in 2017, we have revised up the forecast because of the monetary stimulus from the lower sterling exchange rate, the effects of an improvement in the balance of payments current account arising from the lower exchange rate and the way that will be recorded in the national accounts data, and the additional domestic monetary stimulus provided by the Bank of England in the summer. Without this additional monetary stimulus we would have retained our growth forecast at 2.25 per cent.