Uncertainty is the biggest challenge facing the UK economy
Current Affairs

What does 2017 have in store for the economy?

We’ve written previously about the prospects for peer-to-peer lending in 2017, and the reasons for optimism among platforms following a memorable year for Lending Works. But as the New Year gets under way in earnest, we’re turning our attention towards the wider UK economy, the various indicators within, and what lies in store against the backdrop of a challenging global economic climate, and, perhaps more significantly, Brexit.

A post-EU Britain

Although the economy has shown resilience since the Brexit vote on 23rd June, it must be cautioned that Britain’s departure from the European Union is yet to begin. This process will commence in earnest during 2017, with the prime minister set to invoke Article 50 of the Lisbon Treaty by the end of March. Given the unprecedented nature of such an action, it is difficult to predict how this will affect the various economic spectra.

Forecasts seem to be laced with uncertainty, with conflicting degrees of optimism and pessimism abound across various wings of the media. Certainly there may well be medium to long-term economic benefits to Brexit, particularly in terms of global trade. But, over the next 12 months, it would appear that it will present certain headwinds for the economy.

Growth

Growth forecasts among experts for 2017 have differed significantly, with lows of 0.6 per cent contrasted with more optimistic predictions of 2.5 per cent. But common consensus seems to settle on a figure in and around 1.4 per cent. This would mark a significant downward shift, compared with relatively impressive figures of 2.2 per cent in 2015 and 2 per cent in 2016. Moody’s anticipates global growth to be in the region of 2.9 per cent for 2017 – albeit that, of the G7 countries, only the US and Canada are forecast to see growth levels in excess of 1.4 per cent.

Inflation and the pound

Perhaps the most significant post-Brexit factor for consumers at a microeconomic level has been the depreciation in the sterling, and the expected surge in inflation as a result. As a somewhat import-heavy economy like the UK, the link between the two is intrinsic. The concern is that soaring inflation – forecast to reach 3.5 per cent in 2017 by the National Institute for Economic and Social Research - could erode real wages, which would thus depress consumer spending. This, in turn, could dampen growth, creating a vicious cycle. And the question becomes… once Article 50 is triggered, how low will the pound go?

Interest rates

In theory, the most powerful measure at the Bank of England’s disposal to control inflation is the interest rate. However, in economic terms, this tends to have more impact with respect to curbing spending when an economy is ‘overheating’, or demand-pull inflation. This is unlikely to be the case in 2017, and economists fear a period of ‘stagflation’ – associated with cost-push inflation - instead.

That said, one benefit of increasing interest rates would be that it would likely have a positive effect on the value of the sterling, as better yields are offered to investors. This, in turn, would indirectly assist with keeping inflation in check – not to mention that higher interest rates would provide a much-needed boost for savers and pensioners. Yet the flip side of the coin is that it would be a blow to those facing variable rate debt, and for a country with high levels of household borrowing, this may pose a risk in itself.

The deficit

Much of the appeal to global leaders such as Trudeau and Trump has come by virtue of promises to increase spending and investment – even if it requires borrowing to do so. The UK, however, finds itself facing a large current account deficit, which the Office for Budget Responsibility (OBR) put at 5.7 per cent of GDP for 2016. Public sector net debt is also forecast to reach 90 per cent of GDP over the next 18 months, leaving little room for manoeuvre for Government – particularly if the OBR’s prediction that Brexit could blow a £122 billion hole in the public finances comes to fruition. This may prove to be a straitjacket of sorts during 2017.

Optimism and silver linings

Of course, it isn’t all doom and gloom, and there remains much to be positive about. For starters, the UK led the way among G7 economies in 2016, despite the Brexit vote. Retail figures continue to remain resilient, as do those within the services sector. A study released by Cambridge researchers this week also showed encouraging findings relating to car sales and levels of business confidence, while the FTSE continues to strengthen on the back of a depreciating sterling.

The weakened pound may well provide assistance to exporters too, and, in the longer term, perhaps even rebalance our economy as a result. Early signs are already positive in this respect, with UK manufacturing growing at its fastest pace for two-and-a-half years over the month of December. Construction, too, has boomed at its quickest rate in 11 months.

In truth, it isn’t so much that the outlook is bleak – rather that it contains a lot of unknowns. And uncertainties, with wide scope for variance, can sometimes be a greater enemy for economists than for economies themselves. No doubt, many will be bracing for challenges and headwinds in 2017. But if any economy is robust enough to navigate such rough waters, it is Britain’s.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.