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3 January 2018 | By Alpesh Paleja Insight

The economic outlook for 2018

Brexit started to bite on the UK economy last year, so what can we expect over the year ahead?

This time last year, we said that 2017 would be the year that Brexit would begin to bite on the UK economy. And we were right: quarterly growth for the first nine months of the year has averaged 0.3 per cent, halving from the average rate seen since 2013.

Lower pound driving up costs and prices

While the EU referendum itself seems like a long time ago, most of us can remember the immediate aftermath vividly. Financial markets deteriorated sharply after the vote, most notably with the pound falling by 12 per cent.

On the one hand, the lower pound has delivered a welcome boost to UK exports, against the backdrop of upbeat global growth. But a weaker exchange rate is a double-edged sword. Import costs have risen strongly for businesses, and special surveys that we conducted last year show that firms feel that higher costs outweigh the gain to export competitiveness.

The fall in the pound has also pushed up prices at the till. CPI inflation has risen persistently over 2017, breaching 3 per cent in November. With wage growth staying sluggish, this has led to a sharp squeeze on households’ budgets. As a result, consumer spending has weakened, driving much of the slowing in GDP growth we’ve seen so far.

Brexit uncertainty weighing on investment plans

Alongside a higher cost burden, businesses have also had to deal with ongoing uncertainty over Brexit.

This is clearly hitting plans for capital spending in the year ahead, with around 40 per cent of businesses citing a negative impact from Brexit on their investment plans. This chimes with data from our regular business surveys, in which year-ahead investment intentions recently fell back to the level seen just after the referendum.

2018: more of the same

It looks like it’s more of the same for the year ahead. We expect the tepid economic momentum seen over 2017 to continue, with GDP growth averaging 1.5 per cent this year and 1.3 per cent in 2019.  

On the positive side, we expect the lower pound and strong global growth to continue boosting UK exports. As some of the recent resilience in imports growth wanes, net trade should therefore deliver a more meaningful boost to the economy.

But it looks like households will keep their belts tight. Some of the squeeze on real earnings will ease, as inflation falls back (we expect it to pretty much have peaked) and wage growth shows more signs of life. But real wage growth is likely to remain well below pre-crisis norms, which will curb any impetus in household spending.

Furthermore, as suggested by with our survey data, we expect Brexit uncertainty to continue bearing down on business investment.

Adapting for the future

This isn’t a disastrous outlook for the economy, but certainly isn’t anything to write home about. What can be done to make prospects look better?

Crucially, further progress on Brexit negotiations would go a long way towards alleviating the uncertainty bearing down on business’ investment plans. Following the progress in talks in December, binding Brexit transition terms by the end of spring need to be accompanied by progress on a final deal that delivers barrier-free trade with the EU.

But while Brexit is the top political and economic issue of the day, it is only part of the picture. Many of the fundamental building blocks of our economy – skills, innovation, infrastructure – are firmly within our control. Ensuring domestic priorities stay high on the government’s agenda has been a key theme for us in 2017, and will remain so in the year ahead.

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