Britain's economy could be stronger than previously thought says Bank of England economist

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Strong consumer spending was one of the drivers behind the UK economy's outperformance (Source: Getty)

The underlying growth in Britain’s economy may be stronger than previously thought, according to an influential economist at the Bank of England.

Michael Saunders, a member of the interest rate-setting Monetary Policy Committee (MPC), said the Bank’s errors in forecasting GDP growth may reflect a healthier recovery in the UK economy than previously thought.

The Bank’s forecasts were based on assumptions Brexit would harm the economy, but Saunders said the MPC “was not necessarily obliged” to wait for the full effects of Brexit to become clear before changing monetary policy.

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However, in a speech to the Federation of Small Businesses (FSB) in London he warned growth could come under pressure from rising prices, with the possibility inflation could rise as high as three per cent – well above the Bank’s February forecasts of a peak around 2.75 per cent.

Saunders said: “It is also possible that, unconnected to the Brexit vote, the UK expansion has developed greater momentum and resilience, reflecting low unemployment, several years of solid real income growth, and a reduced emphasis on balance sheet repair following the 2008-09 recession.”

Following the Brexit vote on 23 June the Bank predicted the UK economy would slow markedly, but since then it has upgraded its predictions for growth repeatedly, despite inflation accelerating to an annual rate of 2.3 per cent in March.

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The path for inflation could rise faster than expected, even in the face of sluggish wage growth which is traditionally a driver of price rises.

Saunders said: “My hunch is that in 2017-18 we will see higher near-term inflation, plus a greater rotation of growth away from consumer spending and towards investment and net trade.”

He added: “There are risks that the near-term boost to inflation from sterling’s depreciation will be somewhat steeper” than the Bank predicted in February based on survey evidence from importers.

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