LONDON: The European Commission said Monday it didn’t expect the U.K. economy to slow as sharply as it forecast in November, in response to rising prices and uncertainty over Britain’s future ties to the European Union. The commission, which is the EU’s executive arm, said in its latest set of economic forecasts that it expected annual growth in the U.K. economy to slow to 1.5% in 2017 and 1.2% in 2018, from 2% in 2016. In November, it forecast growth of just 1% in 2017. Its forecast for 2018 was unchanged. The Brussels-based commission said the economy had shown resilience in the months since Britons voted to exit the EU in June and that the impact on growth from the referendum had yet to be felt. It said public and private spending and business investment were all forecast to be stronger this year than it anticipated in November, while a weakened pound should boost British exports. The strength of the U.K. economy in the second half of 2016 wrong-footed many economists, who thought growth would suffer as the uncertainty triggered by the referendum prompted consumers to row back on spending and businesses to slam the brakes on investment.
Instead the economy grew briskly as consumers carried on spending much as before. The U.K. was the fastest-growing of the Group of Seven advanced economies in 2016. The commission said it expected growth to slow in 2017, though, largely as a result of quickening inflation eating into consumer spending. It expected consumer prices to gain 2.5% in 2017 and 2.6% in 2018, exceeding the Bank of England’s 2% target. Inflation in the U.K. is being stoked by a weakened pound, which has shed around 15% of its value against the dollar since the Brexit vote. The unemployment rate is forecast to rise to 5.2% this year from 4.9% in 2016. Business investment is expected to be subdued, although the commission no longer forecasts a contraction. U.K. Prime Minister Theresa May has said she plans to begin formal divorce talks with the EU before the end of March. In its forecasts, the commission said the Brexit negotiations were among the “exceptional risks” that may undermine growth in the EU this year.
