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‘Hard Rebalancing’ ahead for the UK Economy

Published: 23/01/2017 by Comments

‘Hard Rebalancing’ ahead for the UK Economy

The UK economy has a “hard rebalancing” ahead of it in spite of an apparently promising outlook for 2017, a recent report from EY ITEM Club, economic forecaster, suggests.

A recent UK winter report has indicated an increased in its GDP growth forecast for 2017 to 1.3 per cent, higher than an earlier forecast of 0.8 per cent growth forecast in October, primarily on stronger exports.

The report indicates that future growth for the UK is “critically dependent upon a strong trade performance”.

Exports are forecasted to grow by 3.3 per cent throughout the year and 5.2 per cent in 2018, and net export growth is to add 0.8 per cent to GDP “in 2018 and later years”.

Additionally, the UK trade deficit is also predicted to reduce from 4.5 per cent of GDP this year to 3.7 per cent of GDP in 2018 and 2.5 per cent in 2019 from the “boost to the UK’s overseas income from sterling’s weakness” and a “stronger trade position”.

However GDP growth throughout the year is predicted to slow against an expected 2.0 per cent rise in 2016 and is expected to reduce to 1.0 per cent in 2018.
Import costs caused by weakness in the pound are forecasted to nudge inflation up to 3.1 per cent by quarter four of 2017, before reducing to 2.0 per cent by the end of 2018.

Rising inflation is predicted to have “knock on impact on consumer spending, as growth in disposable incomes is eroded”, which will result in a “progressive slowdown in consumer spending as the engine of employment growth stalls and inflation accelerates, squeezing household incomes”.

The report says that the steadying and balancing of economic activity will go side by side with reasonably slow economic growth.

Household real disposable income is forecast drop by 0.3 per cent in 2017.

Consumer spending growth is also forecast to reduce to 1.7 per cent in 2017 and 0.4 per cent in 2018, reduced from 2.8 per cent in 2016.

Employment is forecast to increase by only 0.2 per cent in 2017, having been 1.8 per cent in 2015 and 1.4 per cent in 2016, and is then expected to drop by 0.2 per cent in 2018 and remain static in 2019.

The forecast views unemployment rising from 4.8 per cent in quarter four 2016 to upwards of 6 per cent by the close of 2018.
EY ITEM Club hopes that the Bank of England will retain interest rates at 0.25 per cent “until the spring of 2018”.

Peter Spencer, chief economic advisor to the EY ITEM Club, stated: “We now expect the impact of Brexit on the UK economy to be shallower, but more prolonged than we did in October.”

“However, there is a sea change coming over the next three years.
“The fall in the pound will force the economy to be less reliant on consumer spending, leaving growth heavily dependent upon trade performance.”

Mark Gregory, chief economist at accountants EY, added: “Whatever the outcome of the Brexit negotiations, there are clear indications that the fall in the pound and the UK’s exit from the EU will entail a change in the structure of the UK economy.

“The onus will be on businesses to adapt to the slowing domestic economy by seeking opportunities overseas.”

Photo credit: Bill Smith

Colette Lamb
News article by:
Colette Lamb

A business sector writer with over 15 years of experience working in the marketing, commerce and law sectors' internationally and in the UK. Interests include composing music and other creative communications such as art and dance therapy.

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