The UK economy is losing economic momentum, with figures released today (26 July) estimating growth of 0.3 per cent for the second quarter of 2017.
This represents a slight improvement compared to the first quarter, when growth stood at 0.2 per cent, but year-on-year it has slipped from 2 per cent to 1.7 per cent.
The growth figure for the second quarter was in line with expectations, and as Ben Brettell, a senior economist at Hargreaves Lansdown, points out are in line with pessimistic predictions that ‘inflation-squeezed consumers will cease to be the engine of UK economic growth’.
Earlier this week the UK economy was given the thumbs down by the International Monetary Fund (IMF). The IMF downgraded the growth forecast for the UK economy in 2017 due to ‘weaker-than-expected activity’ in the first quarter of this year.
Previously, the economy was predicted to grow by 2 per cent, but now it is predicted to only grow by 1.7 per cent. The UK growth forecast for 2018 remains unchanged at a lower rate of 1.5 per cent.
In its recent ‘World Economic Outlook’ update, the IMF also revised down its US growth forecast from 2.3 per cent to 2.1 per cent. But its overall global economic predictions remain on track at 3.5 per cent growth in 2017 and 3.6 per cent in 2018.
The IMF is keeping an eye on the impact of Brexit on the UK economy. ‘We have long predicted that Brexit would have some negative long-term effects, but in the case of this year's forecast [downgrade] we are basing it purely on the observation of data for the first part of this year which has been weaker than expected,’ IMF's chief economist, Maurice Obstfeld, told the BBC.
He added: ‘Our projections for long-term British growth are actually based on a pretty optimistic assessment of how the negotiations are likely to turn out, so if things are worse than that it will turn out to be correspondingly worse for the British economy.’
Andrew Lake, head of fixed income at Mirabaud, says: ‘We shouldn’t be surprised [by the downgrade].’ While there has been no impact in the first six months after the Brexit vote, ‘we’re now beginning to see lower investment, and a lack of certainty around tax. We have seen political uncertainty in the UK and there’s no real strategy to what Brexit actually means.’
Further, the UK relies on foreign direct investment and it has a large account deficit. With inflation going up and wages not following, the consumer has less to spend. ‘Most people anticipated that would happen,’ adds Lake.
As long as there is uncertainty over what is going to happen with Brexit over the next two years, this economic weakness is likely to continue.
Chris White, head of UK equities at Premier Asset Management, says it is likely that ‘given the lack of consensus and clarity surrounding Brexit, the UK’s economic growth will wane, at least on a relative basis compared to other European countries.
‘It’s difficult to foresee substantial domestic or foreign investment in the UK given the uncertainty and existing overseas investors may reconsider their positions. The economy will get little help from consumers (unless consumer debt rises further) and the government is cautious about increasing expenditure despite the electorate’s concerns about austerity,’ he says.
‘Whilst this does not mean we are the new ‘sick man of Europe’, we should expect a more fallow period of economic growth over the next couple of years.’
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