UK economic growth to remain strong but slowdown a little in 2016, 2017

In 2015, the UK economy expanded strongly by 2.3%, mainly driven by business investment and private consumption that countered a continued drag from net exports. Even though the economic growth decelerated from 2014’s stronger pace of 2.9%, growth continued to be above potential, while the jobless rate dropped further, to currently 5.1%.

However, the economic growth continues to be unbalance, according to Nordea Bank. The main driver of the growth is service sector, while growth in manufacturing has stalled in the past year because of slowdown in global growth, past decline of the sterling and weak demand for investment from the energy sector.

Moreover, construction has also weakened recently, showing a marked deceleration in housing market activity. UK’s economic growth is likely to remain solid in the future; however, it is expected to slow down slightly in 2016 and 2017 as inflation accelerates and capacity pressures build, noted Nordea Bank. The projection is based on the assumption that the UK will vote to stay in the EU.

“We now project real GDP growth to reach 2.0% in both 2016 and 2017”, added Nordea Bank.

Strong private domestic demand is likely to remain the main growth driver of the UK economic growth, in the face of weak global activity and constant fiscal consolidation in the UK, noted Nordea Bank. In 2016, household spending growth is expected to be strong, though slower. Low inflation, increase in employment and solid wage growth are expected to underpin household spending. However, consumption growth and retail income is likely to ease next year as inflation accelerates towards BoE’s target of 2% and as growth in employment decelerates, according to Nordea Bank.

Meanwhile, house prices continue to increase strongly. Home prices in the UK have risen by an average of 7% from one year ago. However, house prices are likely to moderate next year as demand will weaken after a gradual tightening of monetary policy, added Nordea Bank. A strong domestic demand, recovered access to credit, strong corporate profitability and low borrowing costs are likely to support a continued strong growth in business investment in 2016 and 2017.

However, the uncertainty regarding the EU referendum outcome might result in companies to delay investment plans in the near term. If the UK votes to stay in the EU, investment is expected to pick-up after the referendum on 23 June as companies go ahead with their plans, noted Nordea Bank.

Meanwhile, the policy measures stated during the 2016 budget suggest a slight loosening of fiscal policy from the earlier stance in the following years. But the fiscal drag is likely to reach around 0.75% of GDP in 2016 and 2017. Moreover, net exports are also expected to continue being a drag on the economic growth for some time, according to Nordea Bank. This partially shows the relative strength of domestic demand.