Weak pound and inflation to peg growth back to 1.5pc

RISING prices and weak wage growth are already hitting the economy with households forced to cut back spending, analysts at PWC have warned.

Falls in the pound over the past year have pushed up the cost of imported goods such as food and petrol, while wages have failed to maintain pace, though steady falls in unemployment have helped to cushion the blow.

Pwc’s economists expect the economy to grow by 1.5pc this year, down from 1.8pc in 2016.

This is substantially stronger than the 0.6pc growth that the analysts predicted for 2017 in the immediate wake of the Brexit vote, when fears arose that growth would nosedive.

But it does represent a moderation of the view earlier this year that the economy might end up growing almost without impact from the referendum. Three months ago, economists thought growth would be a little higher at 1.7pc.

Growth will slow further in 2018 to 1.4pc, the new analysis predicts.

This could change depending on developments in the world economy and in the Brexit negotiations.

Strong eurozone and US growth combined with quick Brexit progress could push growth up to 1.9pc this year and 2.6pc in 2018. But a global slowdown and deadlock in the negotiations would lead to extra uncertainty, less investment and hiring, and so growth stalling, potentially even leading to a slight recession.

The central forecast includes a slowdown that is driven by a fall in consumer spending growth from 2.8pc last year to 1.9pc this year and 1.5pc in 2018. Economists still expect households to spend more, but at a weaker pace of growth. “So far consumers have increased borrowing to keep spending growth going, but the household savings ratio fell to a record low in the first quarter of 2017 so there are limits to how much further this can go,” said the report. That pressure is set to increase as PWC anticipates inflation will rise to above 3pc later this year.

Fixed investment, by contrast, is performing better as expectations recover in line with the stronger-thanexpected growth. Investment growth is set to accelerate from 0.5pc in 2016 to 1.5pc in both 2017 and 2018.

“Brexit-related uncertainty may hold back business investment, but this should be partly offset by planned rises in public investment. Fiscal policy could also be further relaxed in the 2017 Autumn budget to offset the ongoing real squeeze on household spending power,” said John Hawksworth, Pwc’s chief economist.

“There are still downside risks relating to Brexit, but there are also upside possibilities if negotiations go smoothly and the recent eurozone economic recovery continues. We expect the UK to suffer a moderate slowdown, not a recession, but businesses should monitor this and make contingency plans.”

The weak pound has also made UK goods more competitive abroad. Combined with higher import prices, this should help reduce the gap between imports and exports, meaning that net exports will only take 0.2pc from GDP this year and 0.1pc next year, rather than the 0.4pc subtracted from the total in 2016, PWC believes.

House price growth could be cut almost in half this year, falling from 7pc in 2016 to 2.7pc in 2017, with households cautious on spending and squeezed by rising prices elsewhere.