LONDON: In 2016, the economy became even more intertwined than usual with politics. British voters decided that a prolonged period of uncertainty over Brexit should follow the financial crisis of 2007-09 and weak recovery. But political upheavals were not restricted to the UK. This reality must shape any assessment of the economy in 2017. The average forecasts for growth of the UK economy in 2017, according to Consensus Forecasts, is now just 1.3 per cent, down from 2 per cent in 2016 and 2.2 per cent in 2015. This reduction is due to the forecast impact of Brexit. But the average conceals a wide range. At the optimistic end, one forecaster predicts growth of 2.7 per cent while, at the pessimistic end, one predicts growth of 0.6 per cent. But the majority expect a significant slowdown next year as the risks of a brutal exit from the EU in 2019 become plausible.
Living standards are also likely to fall, after two relatively good years, as Torsten Bell of the Resolution Foundation points out. One reason is the slowing economic growth. This would mean declining growth of employment and possibly an outright decline. Furthermore, weak sterling and rising inflation will erode real wages. The Resolution Foundation forecasts growth of real earnings at around, or below, zero in the second half of 2017. High inflation will also aggravate the freeze on the nominal value of welfare benefits. The consensus of forecasters for consumer price inflation in 2017 is 2.5 per cent, up from a mere 0.7 per cent in 2016. Again, there is a wide range. The National Institute for Economic and Social Research even forecasts inflation at 3.5 per cent in 2017. The Bank of England is likely to confront a mild stagflation, among the most difficult environments for a central bank. It might also confront a renewed bout of sterling weakness and rising long-term interest rates, as the impact of Donald Trump’s arrival in Washington is felt.
