WIREDGOV

• Economy to grow 2.3 per cent in 2016 and 2.7 per cent in 2017.
• Inflation rate of just 0.3 per cent this year and 1.3 per cent in 2017, reaching 2.1 per cent in 2018.
• Bank Rate now expected to remain ½ per cent until the second half of 2016.
• Chancellor forecast to miss the primary target of the Fiscal Mandate by a slim margin.

The central outlook for the UK economy is little changed. Despite financial market turbulence since the start of the year, our modal GDP forecasts for this year and next are broadly the same as those we published just three months ago. A near-term slowdown in export growth, predominantly a result of weaker demand from emerging markets, is offset by an acceleration of domestic demand as falling oil prices and a marginal loosening of policy act to bolster consumer spending. Growth accelerates again in 2017 as the improving external environment strengthens export demand.

Continued commodity price falls, the depreciation of sterling and weaker than expected data outturns have led us to soften the profile for consumer prices, which will grow by an average of just 0.3 per cent in 2016. However, there are signs that underlying inflationary pressure is holding up more robustly and as the influence of temporary factors wanes we expect inflation to recover to 1.3 per cent in 2017. After this there is a marginal overshoot of the Bank of England’s inflation target, before price growth returns to 2 per cent in 2020.

A key judgement for our forecast is the timing and pace of monetary tightening. We have pushed back the point at which we think the Monetary Policy Committee is most likely to begin raising Bank Rate to the second half of 2016, based on recent communications by committee members and the timing of the UK’s impending referendum on membership of the European Union. However, there remain a number of factors which indicate that commencing with interest rate rises soon would not be inconsistent with meeting the MPC’s remit over the medium term.

November’s Autumn Statement/Comprehensive Spending Review built on the Summer Budgetand presented a further loosening of fiscal policy. Significant increases in government consumption are planned, made possible largely by changes to assumptions underpinning the OBR’s macroeconomic forecasts. Official forecasts suggest the government will hit its main fiscal target, of an absolute surplus in 2019–20, with a marginal degree of room to spare. Under our updated projections, with recently announced spending plans, the Chancellor misses his main fiscal target, albeit by borrowing a modest £600 million in 2019–20. Were the official forecasts to move in the same direction as our own, the inflexibility of the current Fiscal Mandate would induce a tightening of fiscal policy by the Chancellor, irrespective of whether or not this is an optimal response. 

Notes:

The forecast for the UK economy is published in the National Institute Economic Review no. 235 February 2016. Details of NIESR’s previous UK economic forecast can be found here.

For a full copy of the UK economic forecast or to arrange interviews, please contact the NIESR Press Office: Luca Pieri on 020 7654 1931 / l.pieri@niesr.ac.uk  

To discuss the forecast or for interviews, please contact:

• Simon Kirby on +44 (0)20 7654 1916 / s.kirby@niesr.ac.uk
• Jack Meaning on +44 (0) 7766 441144 / j.meaning@niesr.ac.uk

The National Institute Economic Review is the quarterly journal of the National Institute of Economic and Social Research (NIESR). Published in February, May, August and November, it is available from Sage Publications Ltd (http://ner.sagepub.com./) atsubscription@sagepub.co.uk.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contacting enquiries@niesr.ac.uk Switchboard Telephone Number: +44 (0) 207 222 7665