Budget 2017: economy talked up - but are Brexit and inflation being underestimated?

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Chancellor Philip Hammond played up the strength of the UK economy, which has surprised on the high side since last June's Brexit vote, at the start of his 60-minute long spring Budget speech.

The chancellor pointed out that last year Britain was the second-best economic performer among major economies, behind Germany. This flies in the face of predictions from various economists, who had anticipated a recession was on the cards following last June's Brexit vote.

Those forecasts now look wide of the market, thanks to the health of the labour market and the resilience of consumer spending.

The Office for Budget Responsibility (OBR) upped its economic growth forecast for 2017 year to 2 per cent, from 1.4 per cent. Growth is tipped to slow to 1.6 per cent in 2018, and then increase to 1.7 and 1.9 per cent in 2019 and 2020. In 2021 the UK economy is expected to grow at a rate of 2 per cent.

ROOM FOR UPSIDE SURPRISE

Rising levels of inflation, which the OBR estimates will peak at 2.4 per cent this year, is likely to put a squeeze on consumer spending. But the OBR thinks inflation is unlikely to spiral out of control, predicting inflation will be 2 per cent in 2018 and 2019.

The OBR's inflation forecast for 2017 is lower than other commentators, with the majority pencilling in predictions of 3 per cent.

Ian Kernohan, an economist at Royal London Asset Management, makes the point that the OBR does not view Brexit as a threat to growth.

'GDP growth is expected to slow to 1.6 per cent in 2018 and looking beyond that, OBR growth forecasts are a tad lower than their November forecast, although the level of GDP in 2021 is projected to be the same as in the Autumn Statement.

'There is little sense here that the OBR believes that Brexit will be a significant headwind to growth, despite the prime minister's stated aim of leaving both the Single Market and Customs Union; however, its GDP forecasts over the next five years look modest enough to offer some room for upside surprise.'

But the chancellor opted not to increase spending, despite borrowing coming in lower than expected. This is perhaps a sign that Hammond is conscious of risks Brexit brings to the economy.

Sue Noffke, manager of the Schroder Income Growth fund, said: 'Overall, the chancellor has delivered generally what the UK could have hoped for, buoyed by good GDP and fiscal news. But with the hard work and uncertainty of the Brexit negotiations soon to begin, it is important to not get carried away.'

Some respected think tanks offer a more pessimistic stance on the economy, including the Centre for Economics and Business Research (CEBR), which in January pencilled in economic growth of 0.8 per cent this year, which represents the slowest pace since the 2009 recession.

The CEBR's forecast hinges on inflation rising to 2.7 per cent, which the firm says will force consumers to tighten their belts. The think tank says a slowdown in business investment will also materialise, due to uncertainty over how Britain's divorce negotiations from the European Union will pan out once Article 50 is triggered.


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