U.K. economic growth likely to decelerate in 2017, consumer spending to weaken

The U.K. economy expanded better than expected at the end of last year. According to a Scotiabank research report, the economy is expected to grow 2 percent year-on-year in this year. This would be an acceleration as compared to the average growth of 1.6 percent recorded in 2016.

However, the quarter-on-quarter pace of growth is expected to decelerate steadily throughout this year, a slowdown from 0.7 percent in the fourth quarter of 2016 to just 0.2 percent quarter-on-quarter by the end of this year, added Scotiabank. Moreover, even if the quarterly growth rates are likely to be on an upside move next year, the annual average forecast for 2018 is just 1.2 percent.

Consumer is the main growth driver for the U.K. economy. But severely higher inflation is expected to hurt consumer real purchasing power, resulting in slow down of consumer spending growth. Growth in retail sales has already decelerated slightly along with a sharp rise in its deflator. This affirms that the mechanism is working and the GDP growth will decelerate in 2017.

Meanwhile, the economic sectors that are vulnerable to the exchange rate have witnessed an improvement. Growth in manufacturing production has quickened, while net trade has rebounded. But both these sectors are unlikely to totally counter the downside from subdued consumer spending. However, they represent a cushion that might avert too much weakening in GDP growth, added Scotiabank.