BCC upgrades 2017 UK growth forecast, but lowers 2018 expectations

The British Chamber of Commerce has upgraded its growth forecast for the British economy in 2017 following stronger-than-expected consumer spending, but maintained a flat outlook in the medium-term as the country embarks on Brexit negotiations with the European Union.

The BCC raised its GDP growth forecast for 2017 to 1.4% from 1.1%, with growth of 0.4% in the first quarter of this year.

However, it expects the economy to slow to 1.3% in 2018, from an initial forecast of 1.4% before rising slightly to 1.5% in 2019.

The BCC joins other bodies which have raised their growth outlook for the country this year, the Bank of England revised up its forecast to 2% from 1.4% last November and is similar to a revision by the Office for Budget Responsibility.

The OECD now forecasts 1.6% growth in 2017 from 1.2% last November, while the International Monetary Fund expects 1.7% growth from 1.4% previously predicted.

The BCC’s upgrade was driven by these official upward revisions to GDP growth in the final quarter of 2016 and stronger-than-expected levels of consumer spending, as well as a slight improvement in the outlook for investment and trade, compared to the body’s previous forecast.

But the BCC expects economic growth to remain well below its long-term average over the forecast period due to a slowdown in consumer spending from 1.6% in 2017 to 0.9% in 2018 and 1.1% 2019 as pressure from inflation erodes real wages.

Inflation is predicted to breach the BoE’s 2% target this quarter after which the BCC said it will be passed onto consumers as companies will face higher input costs.

The country’s net trade position is expected to improve over the next few years as the BCC upgraded export growth to 2.7% in 2017 from 2.3%, and to 3.1% in 2018 from 2.9%. It is expected to grow 2.8% in 2019.

For sectors, construction has been upgraded to 0.4% in 2017 from -2.0% and is expected to grow 0.2% in 2018 and 1.0% in 2019.

Services is forecast to grow 1.9% in 2017, 1.5% in 2018 and 1.7% in 2019, while manufacturing is to expand 1.2% in 2017, 0.7% in 2018 and 1.0% in 2019.

However, investment is to contract this year, with subdued growth predicted in the following years, due to uncertainties relating to the outcome of the government’s negotiations with the EU.

The BCC said that in the period of uncertainty as a Brexit deal is negotiated there would be heightened risks to the forecast as higher levels of inflation and increased anxiety around Brexit could result in more muted growth, although continued consumer spending could bolster growth.

BCC director general Adam Marshall said that with several years of growth ahead for Britain and inflationary pressure and Brexit, it is important to “tackle the long-standing constraints that limit business confidence and growth here at home”.

He said that last week's Budget delivered by Chancellor Philip Hammond was a “missed opportunity” for infrastructure improvements, to support international trade, lower heavy up-front taxes and costs that undermine business investment.

“More thoughtful and radical moves to improve the business environment would give businesses - and GDP forecasts - a boost during a critical and complex time.”

Suren Thiru, head of economics at the BCC, said: “The UK economy is still set to enter a more subdued period, with growth expected to remain materially below trend over the near term. The resilience in consumer spending, a key driver of UK growth, will slowly dissipate over the coming months as higher inflation and muted wage growth combine to erode consumer spending power."

Thiru said that the Britain’s trade position will improve across the forecast period supported by weak sterling and an improving outlook for the global economy, but imbalances in the economy continue to leave the country increasingly exposed to economic shocks.

“While household consumption’s contribution to UK GDP growth is likely to decrease over the near term, the slight improvement in investment and trade prospects over the same period is not expected to be enough to prevent a slowdown in overall growth.”