5 January 2017 | By Alpesh Paleja Insight

2017: uncertainty and opportunity

Insight: Alpesh Paleja, CBI principal economist, surveys and economic analysis

The economic outlook for the coming year is far from clear, but there are encouraging signs of resilience and the potential for export growth

Many words can be used to describe 2016: interesting, challenging, unpredictable. It’s no exaggeration to state that the EU referendum has re-defined the UK’s political landscape, and 2017 will be the year where we start to see some of the economic repercussions. In an unusual display of unanimity, economists are widely using one word to describe the year ahead: uncertain.

2016 was actually a decent year for the UK economy. GDP growth remained resilient just after the referendum, and looks set to be in line with or even a little above the CBI’s forecast of 2 per cent. However, most economists expect softer activity in 2017: CBI's forecast of 1.3 per cent growth has been revised from our pre-referendum expectation of 2 per cent.

Softer spending

Almost all of this is due to weaker business investment, with CBI members and surveys telling us that uncertainty around the outcome of EU negotiations is putting the brakes on capital spending. As a result, we expect business investment to fall from mid-2017 onwards, before stabilising at the end of 2018.

We’ll also see softer consumer spending. The post-referendum fall in sterling is already pushing up import costs for businesses; this will feed through to prices at the till, stoking a faster rise in inflation. The resulting pressure on households’ real incomes will weigh on consumer spending.

Export opportunities

There are some bright spots, however. The weaker pound should feed through to export growth, and we expect a substantial boost from net trade to the economy both this year and in 2018.

But this isn’t guaranteed. Higher import prices could take the edge off this boost, given that many UK exports are made up of imported components. This was illustrated in CBI’s manufacturing survey last year, where almost half of respondents believed that a lower pound was negative for their business.

EU negotiations

While economic prospects look softer, it’s worth remembering that businesses are tackling the challenges posed by Brexit head on – as testified by the recent resilience of the economy. Across the UK, companies are preparing for life outside the EU, and are 100 per cent committed to making it a success.

Nonetheless, this is taking place against a backdrop of heightened uncertainty, so the risks to any UK forecast are pretty big at present. In particular, the longer-term outlook hinges on the outcome of EU negotiations.

Global factors

That’s before we even look at global risks. Like the UK, the US has also seen a year of change. While looser fiscal policy from a Trump administration could lift near-term activity, there isn’t much clarity over Trump’s eventual actions on issues such as trade and immigration. And strains in the global financial system could rear their heads: in the eurozone, where a series of elections could spark jitters, and in China, where debt and credit expansion have been rising.

The UK is well placed to weather all this. Our economic fundamentals are strong, and Brexit presents both challenges to overcome and opportunities to seize.

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