The British economy predicted to suffer slowest growth since 2012 as inflation hits consumers

 
Jasper Jolly
Inflation Continues To Slow For The Third Month But Fails To Hit 2% Target
Rising consumer prices have dented consumer spending (Source: Getty)

The UK economy will slow this year and next to its slowest rate since 2012 as Britons continue to tighten their belts in the face of rising inflation, according to new forecasts predicting an even bigger hit to consumer spending.

Annual GDP growth will slow to 1.5 per cent this year and 1.4 per cent in 2018 as demand stutters, according to forecasts by accountants PwC.

The rising cost of everyday items led to a slowdown at the start of the year after resilient spending led the economy to end 2016 in far better shape than many prominent economists had predicted in the aftermath of the Brexit vote.

Read more: Weak government after election shock to dent British economic growth

However, the effects of the sharp decline in the value of sterling after the EU referendum have fed through to a steep rise in inflation, from only 0.5 per cent annually in June 2016 to 2.9 per cent in May. The latest inflation data will be revealed this morning, with PwC predicting it will remain at an average of 2.9 per cent even in 2018.

The new forecasts show consumer spending growth falling to 1.5 per cent, a significant downward revision from PwC’s earlier March forecasts which anticipated consumption growth of two per cent. Consumer spending growth reached 1.7 per cent in 2016, according to the Office for National Statistics.

John Hawksworth, chief economist at PwC, said: “We expect the UK to suffer a moderate slowdown, not a recession, but businesses should be monitoring this and making contingency plans.”

“There are still downside risks relating to Brexit, but there are also upside possibilities if negotiations go smoothly and the recent Eurozone economic recovery continues.”

Read more: British economy slowed in first quarter say economists

Crucial data released next week will show if weakness in UK economic growth continued in the second quarter. In the first three months of 2017 the UK economy expanded by only 0.2 per cent, the slowest in a year.

Given the doubts over consumer spending, the prospects for a stronger expansion in the UK economy may depend on increased business investment.

There has been some survey evidence of increased investment in recent months particularly among export-focused businesses, although that has yet to translate into increased investment overall, which rose by only 0.1 per cent in the first quarter of 2017.

Hawksworth said: “Brexit-related uncertainty may hold back business investment, but this should be partly offset by planned rises in public investment. Fiscal policy could also be further relaxed in the 2017 Autumn Budget to offset the ongoing real squeeze on household spending power.

Read more: British economy to "shift down a gear" despite rosier near-term outlook

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