UK economy set for ‘bumpy ride’ in 2017 as inflation hits growth

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The UK economy defied expectations in 2016 as Britons decided to keep calm and carry on spending following the Brexit vote – but there are fears it could be in for a bumpy ride over the year ahead.

Growth showed surprising resilience in the face of recession fears, with warnings from the Bank of England ahead of the EU referendum proving unfounded.

However, the pound’s plunge in value since the June decision may see growth falter in 2017, as policymakers warn over an inflation shock that could spark a cost of living crisis for many.

And experts are concerned surging prices from weak sterling will bring an end to the consumer spending spree that has helped prop-up growth since the referendum.

John Hawsworth, chief economist at PricewaterhouseCoopers, said while recession is likely to remain off the cards in 2017, the outlook is mixed across the difference sectors of the economy.

He said: “We are not predicting a recession and parts of the UK economy should remain relatively strong, particularly in the consumer services, tourism and technology sectors.

“But manufacturing and construction may continue to struggle and the City could suffer some loss of business to other EU countries due to the anticipated impact of Brexit.”

Borrowing levels will also remain high in 2017, with the OBR forecasting that the Chancellor will overshoot his target this year by nearly £13bn to £68.2bn, while forecasts were raised for the next five years.

Economists believe rates will be held at 0.25 per cent throughout the whole of 2017, although with the uncertainties over the Brexit negotiations and surging inflation on the horizon, the outlook is unclear.

The mixed forecast comes amid a fresh legal challenge over the Government’s attempts to begin the formal process of leaving the EU without a vote in Parliament. Four anonymous claimants have joined a judicial review of the Government’s plans, arguing that separate approval is needed to withdraw the UK from the European Economic Area.

Chancellor Philip Hammond has already ditched predecessor George Osborne’s plan to achieve a budget surplus by the end of the decade and is hoping to invest in infrastructure to see Britain through the worst of the Brexit fall out.

The Bank launched its action to shore up the economy after the EU vote in August, when it halved the base rate to 0.25 per cent and unveiled a package of measures worth more than £170bn.

This came as a marked departure from the Bank’s forward guidance at the end of last year, which had suggested rates would be increased early on in 2016 –prompting many homeowners to fix their mortgage rates.

A very cautious Bank had at one stage guided that more rate cuts were on the cards, though it has since rowed back on this as growth has proved better than expected. The news comes after London’s top-flight index surged to an all-time high and recorded its best year since 2013 after riding out a turbulent 12 months thanks to a boost from the Brexit-hit pound.

The FTSE 100 smashed its mid-session record and set a new all-time closing high by rising 22.57 points to 7,142.83.

The late surge saw the UK’s premier index break above the mid-session record of 7,129.83 recorded on October 11 and record a fresh closing high for the third day running.

It came as London emerged as the best performer out of the major European stock markets this year.

Market Report: Page 17.