Surging inflation is set to dent real wages and resilient consumer spending, according to an influential think tank.
Inflation will almost quadruple to 2.7 per cent over the course of 2017, according to the Centre for Economics and Business Research (Cebr).
The UK’s economic growth will stutter in 2017 as the effects of the consequent fall in consumer spending take hold. Consumers are predicted to spend less as rising shop prices outstrip wage growth.
Cebr predicts UK GDP growth of only 0.8 per cent in 2017 – the lowest point since 2009 during the financial crisis. It will eventually return to 2016 levels of 1.8 per cent in 2019.
Nina Skero, managing economist at Cebr, says, “In 2017, new challenges such as rising inflation will combine with existing ones including weak wage and productivity growth to make for a difficult year.”
Hardy consumer spending was the main factor in preventing a widely predicted economic slowdown after the UK’s vote to leave the EU, according to the Bank of England’s (BoE) chief economist, Andy Haldane.
If Haldane’s predictions of a “difficult year” for consumers play out it would knock out an important factor in the UK economy, says Cebr.
The news comes as City A.M. learns that a large food supplier is in talks with supermarkets about further price increases.
Business investment is also expected to fall rapidly as the UK formally begins the process of Brexit by triggering Article 50 of the Lisbon Treaty. Cebr expects a fall in business investment of 3.9 per cent as companies await clarity on a future trade relationship.
Skero said: “A simultaneous consumer and business investment slowdown will leave the economy without two key growth drivers, but there are some reasons for cautious optimism. Although the labour market is set to soften, by historic standards the unemployment rate will remain low.”
Unemployment is set to rise to 5.3 per cent in 2017 under Cebr’s central forecast. This would represent a steep increase, although though still below the average for the previous 10 years of 6.6 per cent.
The rise in unemployment should reduce the temptation for the BoE to raise interest rates to fight inflation, according to the Cebr. Rates will not rise until “at least mid-2018”, according to their report.
A weaker pound may also spur domestic production in some sectors by making imports more expensive, says Cebr.