Economy will start growing faster in run up to Brexit says think tank
ECONOMISTS have been ‘too pessimistic’ about Britain’s prospects following the Brexit vote and growth is expected to accelerate this year, a major study says today.
The National Institute of Economic and Social Research expects the growth rate to pick up from a five-year low of 1.7 per cent in 2017 to 1.9 per cent in 2018 and 2 per cent in 2019 – when Britain leaves the European Union.
And in a stark warning to debt-laden borrowers, the think-tank predicts interest rates will rise early next year as the economy bounces back, pushing up the cost of mortgages and other loans.
The Bank of England, which sets borrowing costs, will deliver its latest assessment on the economy tomorrow when it is expected to leave rates unchanged at 0.25 per cent.
NIESR director Jagjit Chadha said: ‘According to our forecast, 2017 will mark the trough for growth.
‘Thereafter, we envisage a modest recovery that takes growth to a level that is close to potential.’
A separate report by the Confederation of British Industry shows output from the UK’s small and medium-sized manufacturers is rising at the fastest pace for seven years.
Large manufacturers are also in rude health, with Rolls-Royce yesterday reporting a 12 per cent surge in revenues to £7.6billion in the first half of the year amid booming global demand for its aeroplane engines.
Meanwhile, research group Markit yesterday said exports were rising at the second fastest pace on record. Lee Hopley, chief economist at EEF, the manufacturers’ organisation, said: ‘UK manufacturers appear to be riding high going into the second half of the year.’
Economic growth in the UK eased from an 11-year high of 3.1 per cent in 2014 to 2.2 per cent in 2015 and 1.8 per cent in 2016 as a slowdown set in before the Brexit vote.
Growth of 1.7 per cent this year would be the weakest since 2012 but far stronger than the 0.8 per cent predicted by the Bank when it cut interest rates to 0.25 per cent in August last year.
The squeeze on family finances as Britain heads towards an EU exit in 2019 is also likely to be less painful than previously feared, with inflation peaking at 3 per cent at the end of this year rather than the 3.4 per cent predicted in May.
Against this backdrop, the think-tank argues that the Bank should raise rates to 0.5 per cent in the first quarter of 2018.
Pre-referendum, the Treasury was even more pessimistic than the Bank and warned a vote to leave the EU would trigger a painful recession.
Instead, the economy has continued to grow, unemployment is at a 42-year low and record numbers of workers have jobs. NIESR economist Amit Kara said: ‘The economy is doing better than the most pessimistic forecasts. The economy has done better than the Bank forecast at the time. Does that imply an error? No. It was right for the Bank to do what it did. Hindsight is a wonderful thing.’ In the so-called ‘ dossier of doom’ published before the referendum in June, the Treasury said the economy would suffer a punishing year-long recession following a Brexit vote.
It predicted that gross domestic product could fall for four quarters in a row. Instead, the UK economy has clocked up four quarters of growth, with the NIESR expecting the pace to pick up again in the second half of this year.
Mr Chadha said: ‘GDP growth scenarios related to exit from the EU that were at the lower end of the distribution have so far proved to be too pessimistic.’
Predictions too pessimistic’