UK economic forecast
The UK economy continues to display a lack of momentum and shows little sign of breaking the pattern of stunted growth seen in the second half of 2017.
Our latest Spring Forecast expects UK GDP to grow by 1.6% in 2018, a downgrade from 1.7% in our Winter Forecast, and then by 1.7% in 2019.
The severe weather seen at the end of February and the first half of March appears to have weighed down significantly on economic activity at the beginning of the year. We now expect that GDP growth in the first quarter of 2018 was around 0.2% quarter-on-quarter (q/q) and we forecast it to bounce back to 0.5% q/q in the second quarter of 2018.
Consumers can expect to see a ‘double positive’ for real income growth, with inflation set to fall and stronger pay growth anticipated. The EY ITEM Club forecasts real household income growth to hit 1.2% in 2018 and 1.4% in 2019, a substantial improvement on 2017’s 0.2% rise.
For business, business investment should be supported by greater clarity over Brexit after a transition period was agreed in March. However, with a weak end to 2017 providing a poor launch pad for growth this year, we expect business investment to expand by 1.7% in 2018 before picking up to 2.7% in 2019.
For our full findings, download our forecast.
2017, a better year than expected …
- GDP growth in 2017 was 1.8%, a better performance than had been expected at the start of the year given Brexit uncertainties and the substantially increased squeeze on consumer purchasing power.
- GDP growth was limited to 0.3% quarter over quarter (q/q) in Q1 and Q2 2017, improving gradually to 0.4% q/q in Q3 and 0.5% q/q in Q4.
- However, this was the weakest expansion since 2012 and was lower than global growth and the stronger expansion in both the Eurozone and US.
2018 UK outlook
- We forecast GDP growth of 1.6% in 2018 with the UK economy stable but sluggish despite some improved conditions.
- We expect the Bank of England to raise interest rates twice this year, we believe the first increase will take place in May increasing from 0.5% to 0.75% and for 0.75% to 1.0% in November.
- We project real household income growth to hit 1.2% in 2018, a substantial improvement on 2017’s 0.2% rise. However, the stronger income growth is unlikely to result in an improvement on 2017’s 1.7% rise in consumer spending.
- A recovery in sterling, particularly against the US dollar, means that the ‘sweet spot’ in exchange rates enjoyed by UK exporters is set to be soured. We forecast that UK export growth will fall to 3.3% in 2018 from 5.7% in 2017.
Businesses should not take the stable, if sluggish, economic forecast as an excuse to sit and wait. It’s important to test their short-term resilience and mitigate the potential risks while thinking hard about the future. While the short-term outlook is cloudy, it should not stop the pursuit of sunnier days."