UK economic growth tipped to rebound thanks to global boom

Economic growth in the UK is poised to rebound this year after a slowdown in 2017, as a strong global performance offsets the impact from the Brexit vote, a leading economic forecaster has said.

The National Institute of Economic and Social Research (NIESR) said the strength of the world economy and the benefit for British exporters from the weak pound would help increase GDP growth by almost 2% this year and next – which was higher than many other forecasts.

Against this backdrop, it said, the Bank of England would probably raise interest rates in May and again within six months.

The NIESR’s expectation of GDP growing by 1.9% this year and in 2019 is a rise from the previous estimate of 1.7% for both years.

The institute said the change reflected the more positive outlook for the global economy and took into account some of the progress made by ministers to move the Brexit talks on to trade matters.

The upgrade stands in sharp contrast to the expectations of other respected economic forecasters, such as the International Monetary Fund, that Britain will experience a further slowdown this year after recording its slowest growth since 2012 last year. UK growth dropped to 1.8% in 2017 from 1.9% in 2016.

Analysts at the Office for Budget Responsibility, the government’s independent forecaster, revealed a sharp fall in growth expectations alongside the budget in the autumn. They forecast that the rate of expansion would fall to 1.4% this year before dropping further still to 1.3% in 2019, amid a deterioration in consumer spending triggered by the Brexit vote.

However, the UK economy is benefiting from a sustained upswing in growth across the developed world, from the US and China to the eurozone, as the world economy finally recovers from the ravages of the 2008 financial crisis – despite this week’s stock market gyrations. Britain recorded its fastest rate of growth in the final three months of the year, despite some pockets of weakness triggered by the EU referendum.

Consumer spending has fallen as a consequence of weak wage growth and the fall in the value of the pound in the aftermath of the EU referendum, which drove up the cost of imports. However, the NIESR said the weaker exchange rate and buoyant global demand for goods and services was helping to rebalance the economy away from domestic growth and towards stronger export growth.

Inflation is expected to drop this year as the impact of the fall in the pound washes its way out of the system, having potentially peaked at 3.1% at the end of last year, which is expected to help pave the way for a rebound in consumer spending. The NIESR said it expected the Bank to raise interest rates by 25 basis points every six months from May, until the cost of borrowing hit 2% from a current level of 0.5%.

The performance of the economy could have been a lot worse without the rebound in global growth, the NIESR added: UK economic growth would have been around 1.2% last year as a consequence of the EU referendum, instead of 1.8%. “The contribution of the global recovery to the UK has been critical,” the thinktank said.

There are, however, risks ahead should the Brexit talks fail. The NIESR said its forecasts were reliant on Britain achieving a soft Brexit or retaining almost-full access to the EU market. Failure to reach a deal and Britain falling back to trading with the EU using World Trade Organization rules would lead to a long-term annual loss in GDP per capita of up to £2,000, or almost 6%, relative to the current expectations.