U.K. GDP growth likely to slow down to 1.6 pct in 2017 and to 1.2 pct in 2018 – Danske Bank

The U.K. economy was remarkably resilient to Brexit uncertainties in the second half of last year, as GDP growth came in stronger than in the first half of 2016. There were many reasons for this. The instant easing of monetary policy from the BoE, the clarification of the political situation and the postponement of triggering Article 50 explained why sentiment among consumers and businesses was restores rapidly, after most economic indicators dropped sharply in July. Moreover, the solid acceleration of economic growth in the remainder of the world was positive for the U.K, noted Danske Bank in a research report.

However, there are signs that show that the U.K. economy is decelerating, consistent with what was anticipated earlier as the first quarter GDP growth of this year was just 0.2 percent. Indicators also imply that growth was not much higher in the second quarter. In comparison, the economy expanded 0.6 percent sequentially on average in the second half of 2016. The main reason is that private consumption has decelerated as the weaker GBP corresponds to a de facto wage cut, stated Danske Bank. The subdued pound has pushed up import prices and thus consumer prices eroding consumers’ purchasing power.

The combination of still weak nominal wage growth and higher inflation signifies that real wage growth has turned negative for the first time since 2014.

“We do not expect business investments to compensate for slower private consumption growth, as we believe firms will be more reluctant to invest due to Brexit uncertainties, so we think GDP growth will slow from 1.8% last year to 1.6% this year and 1.2% next year”, added Danske Bank.

Some have argued that growth might have been triggered by GBP depreciation through more exports but this has not been the case as U.K. export firms are depending on imported inputs to production and input prices have risen sharply.