Britain to dodge recession but pay to keep getting squeezed
LONDON: Britain will avoid recession in the coming year but economic growth is expected to lag the euro zone, a Reuters poll showed yesterday.
Consumers will feel the pinch from wage increases failing to keep up with rising prices.
It is just over a year since Britons voted to leave the European Union, a decision that has knocked around 13 per cent from sterling’s value, in turn driving inflation well above the Bank of England’s 2 per cent target as imports became more expensive.
Inflation will peak at 2.9 per cent in the last quarter of 2017, according to the poll of almost 70 economists taken this week, but that won’t push the central bank to tighten its ultra-loose monetary policy anytime soon.
Bank Rate was cut to a record low 0.25 per cent in the months after the Brexit referendum and won’t be lifted until 2019, the poll found.
“UK monetary policy is likely to be (as it should be) ‘data dependent’,” said Simon Wells at HSBC.
“The data are likely to stay fairly weak as consumers continue to face an income squeeze and firms wait for more clarity on the Brexit deal before growing investment rapidly.”
Consumers played a key role in driving economic growth last year but pay increases have been lagging inflation, something that is expected to continue.
Wages will rise 2.2 per cent this year and 2.5 per cent next whereas inflation will average 2.7 per cent in 2017 and 2.6 per cent in 2018, according to medians. The BoE forecasts wages will rise 3.0 per cent next year.
Reuters polls over the past few months have repeatedly said a disorderly Brexit, where no deal is reached when the two years of talks are due to conclude, would be the worst outcome for sterling and Britain’s economy.
Negotiations over leaving the EU have not begun well due to disagreements among Prime Minister Theresa May’s team of ministers about the kind of deal they should be seeking, a former top British diplomat said this week.
In the first full round of Brexit talks last month there was little compromise between the two sides on key disputes and the lack of clarity around how the divorce ends has stopped firms from investing.
BoE Governor Mark Carney has said uncertainty about Brexit – in particular, lower investment by companies – meant the economy could not grow as fast as before without pushing up inflation.
But the economy is still expected to grow, albeit slowly, and there is a median likelihood of a recession in the coming year of just 20 per cent. Only two economists polled – at Fathom Consulting and BayernLB – gave a forecast above 50 per cent.
Britain’s economy – one of the fastest growing among the Group of Seven rich nations last year but now one of the slowest – will expand just 0.3 per cent per quarter through to the middle of next year, the poll found.
That compares with predicted 0.4 per cent per quarter forecasts for the euro zone. — Reuters