UK growth to lag peers; next rate hike a year away at least

LONDON: British economic growth will remain tepid over the coming few years, lagging well behind its peers, and could even be worse than economists polled by Reuters currently predict, as most say risks to their forecasts are to the downside.
These findings are in stark contrast to a Reuters poll also taken November 13-16 on the euro zone, which found economists at their most optimistic about economic performance on the Continent since the financial crisis.
Rather than sinking into a predicted mild recession following its shock June 2016 decision to leave the European Union, Britain was for a while one of the best-performing developed economies.
But this year it has quickly fallen behind to be the laggard. Spending by consumers, who drove a large part of that early growth, is now being squeezed by price rises far outpacing wage increases.
“While we expect price pressures to ease in the new year, UK households will continue to see their spending power decrease for some time as wage growth remains lacklustre,” wrote Kay Daniel Neufeld, senior economist at the Centre for Economics and Business Research, a consultancy.
Median forecasts in the poll of nearly 80 economists, taken this week, was for the British economy to expand just 0.3-0.4 per cent per quarter through to June 2018, with growth of 1.5 per cent this year and 1.3 per cent the next.
That is significantly slower than annual growth rates of 2.2 and 1.9 per cent predicted for the euro zone economy, which over the past decade has tended to underperform Britain.
While the poll found only a median 20 per cent chance of a UK recession in the coming year, 60 per cent of economists who answered an extra question said the risk to their forecasts was to the downside.
“Risks to our main scenario for UK growth in 2018 are weighted somewhat to the downside due in large part to the risk of adverse political shocks, particularly around the Brexit negotiations,” noted John Hawksworth, chief economist at PricewaterhouseCoopers.
Britain is scheduled to leave the EU by the end of March 2019 when two years of negotiations over the divorce settlement and future relationship come to a close.
So far, those negotiations have been far from fruitful. A Reuters poll last month said the most likely eventual outcome would be an EU-UK free trade agreement, but it also found the chance of a disorderly Brexit — where no deal was agreed — had crept higher to 30 per cent.
“We see Brexit as the main driver of the economic outlook, and given the uncertainty about how the talks will play out, a wide range of potential outcomes for the economy,” Morgan Stanley economists wrote to clients.
Similarly, foreign exchange strategists in a recent Reuters poll said progress in the divorce talks would give the biggest boost to sterling in the coming year.
British inflation soared after sterling plummeted in the aftermath of the Brexit vote — it registered 3.0 per cent in October. But it is likely to drift lower in coming years.
The poll predicted average consumer prices rising an average 2.7 per cent this year, 2.5 per cent next and 2.2 per cent in 2019 — all above the central bank’s 2 per cent target. A plurality of economists said forecast risks were skewed to the upside.
Inflation unexpectedly held steady last month, wrong-footing the Bank of England and raising fresh questions about the wisdom of its first rate rise in a decade earlier this month and just how fast the central bank will follow up with another. — Reuters