The Economic Outlook in 2017

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Eton Bridge Partners recently hosted an evening of intimate, open conversation with fellow CFOs to discuss the UK and global economic outlook, chaired by Dr. Peter Andrews, Agent for Greater London, Bank of England.

Here, Peter who represents the Bank of England, shares their thoughts on the economic outlook in 2017.

How do prospects for the UK economy look in early 2017?  Growth has proved surprisingly resilient since last year’s EU referendum and the Bank of England’s February forecast pointed to a stronger outlook for 2017 than predicted last November.

That more positive picture is the product of several factors, including a brighter outlook for the global economy, plus the benefits to trade from the big drop in sterling in 2016; the low cost of borrowing for households and companies; and a boost from the Chancellor’s Autumn Statement. Household spending grew robustly in 2016 although there signs now that retail spending growth is beginning to slow as inflation begins to rise.

So it’s no surprise that when I visit London businesses to hear how they’re doing, many are positive.  For example, the skyline tells the story of active development and infrastructure work; the technology, media and creative sectors are growing apace; and professional advisers are helping their clients to face the new set of challenges.  See a summary of the findings of the Bank’s Agents around the UK here.

Overall, however, the picture is mixed.  For example, there’s some uncertainty about the post-Brexit landscape, particularly for those companies that rely heavily on international trade, and some investment plans have been affected.

In the nearer term, last year’s drop in the value of sterling has pushed up import prices and this is passing through to businesses and consumers.  The February forecast envisaged that Consumer Price Index (CPI) inflation would peak at 2.8% in early 2018.  This will inevitably squeeze households’ spending power.  This is part of the reason why the level of GDP is still expected to be lower in two years’ time than the Bank had projected last May, before the EU referendum.

So the Bank’s Monetary Policy Committee (MPC) faces a difficult balancing act – how to keep inflation under control without risking higher unemployment.

Announcing their decision in March to keep Bank Rate at the historic low level of 0.25%, the MPC judged it appropriate to allow inflation to rise above its 2% target for a period to support growth and jobs.  But they also noted that there are limits to that tolerance, depending on the evolution of inflation, pay growth, and demand growth in the economy.

So they will watch the economy closely, in particular patterns in wage growth and household spending, over the coming months.  Assisted by the Bank’s Agents in London and around the UK, the Bank’s policymakers will react as required to help steer the economy through as smooth a course as possible.

Dr. Peter Andrews, Agent for Greater London, Bank of England