UK economic growth prospects rosy in the short-term and in the long-term

Late last year I wrote that UK GDP would grow by nearly 2% a figure that compared with a consensus of some 1.2% then and as of yesterday about 1.3%. My optimism surprised many. Today I am a little nervous as the notoriously inaccurate/pessimistic Bank of England revised up its forecast to 2% also, having forecast it at 1.4% in November and just 0.8% in August. Who knows they might even hike it back to the pre-referendum forecast for 2017 to 2.3%! And now watch the consensus forecast rise too because of the classic group mentality.

My own optimism that growth would barely slow if at all in 2017 was based on a number of factors:

Firstly, consumer spending will undoubtedly slow somewhat as a result of the squeeze in real personal disposable incomes from higher inflation via a weaker exchange rate but not as much as expected. Consumers not surprisingly remain pretty confident in this new pre-Brexit world and continue to spend as we have seen from Q4 data. Expect consumer borrowing to rise and the savings ratio to fall back even more, while unemployment will remain close to current lows, facilitating a rise in consumer spending close to 2% from 2.8% last year.

Secondly expect the weaker pound to have a significant impact in raising net exports. Competitive devaluation can still be effective in driving export volumes up and I believe we can see the same positive impact as in 1991. This is likely to be reinforced as a result of only a weak upturn in inflation here and a pick up in global growth. Indeed business surveys have reported strengthening export order books.

Thirdly the drag from a tight fiscal stance was eased a little in the Autumn Statement which loosened the fiscal rules. We are seeing a modest increase in infrastructural investment spending.

Fourthly,  the monetary policy stance will remain easy with base rates unlikely to be raised from their ultra low 0.25% anytime soon. The Bank is likely to remain wary of going too soon in hiking rates fearful of the consequences, and is reinforced by its relaxed views about inflation, particularly with respect to any feed-through into wages or inflation expectations.

Finally, the economy had a strong growth momentum going into 2017 with Q4 GDP up a preliminary 0.6% y/y. Simple base effects will leave average growth higher this year than if we had seen a slowdown as others expected for H2 2016.

In a future blog I will look at our longer term growth prospects which I believe are good.