Stable but sluggish

BY Richard Summerfield               

The UK is expected to see GDP growth of 1.6 percent in 2018, according to the latest EY ITEM Club Spring Forecast.

Continuing 2017’s "uninspiring" growth levels, the country’s 2018 forecast has actually been slightly downgraded from 1.7 percent. Q1 GDP figures are expected to show growth of just 0.2 -0.3 percent, primarily due to the severe weather that hit the country at the end of February and beginning of March. The final quarter of 2017 saw 0.4 percent year-on-year growth.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The UK economy is chugging along at a fairly steady but uninspiring rate. On the surface, the outlook appears stable. Inflation, which impacted consumer spending last year, continues to drop and we expect a tight jobs market to deliver some uptick in pay growth. Significantly, a transitional Brexit agreement between the UK and EU has been agreed which should also bring some certainty to businesses and support investment, although it still needs to be ratified. However, these factors may be offset by rising interest rates, a recovery in sterling’s value and still appreciable Brexit uncertainties bringing new headwinds over the year.”

EY expects the second quarter of 2018 to see quarter-on-quarter growth of 0.5 percent. Consumers are expected to experience a ‘double positive’ for real income growth moving forward, with inflation set to fall and stronger pay growth anticipated.

Household income growth is expected to reach 1.2 percent in 2018, rising to 1.4 percent in 2019, a marked improvement on 2017’s 0.2 percent increase. However, the income growth is not expected to translate into an improvement on 2017’s 1.7 percent rise in consumer spending.

The economic uncertainty caused by the ongoing Brexit negotiations should be alleviated shortly, and business investments should benefit as a result, according to the report. Yet due to the weak growth recorded in the second half of 2017, business investment in the UK is only expected to grow by 1.7 percent in 2018 before picking up to 2.7 percent in 2019.

However, Brexit is not the only cloud on the horizon. “Potentially adverse developments in trade policies and geopolitics could hit trade flows”, according to Mark Gregory, EY’s chief economist, UK. Though a resurgent global economy bolstered the UK’s economy, geopolitical headwinds could still curtail growth in the coming months.

Report: EY ITEM Club Spring Forecast 2018

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