UK economic growth held up better than expected in the six months following the Brexit vote, particularly as regards consumer spending. But growth slowed in the first half of 2017 as inflation rose sharply, squeezing household spending power.
In our main scenario, we project UK growth to slow from 1.8% in 2016 to around 1.5% in 2017 and 1.4% in 2018. This reflects slower consumer spending growth, offset by some rise in UK exports and public investment. But risks to growth are weighted to the downside due to Brexit.
The housing market is likely to remain subdued for the next couple of years, but lack of supply and rising demand will keep property prices rising in the longer term.
The Bank of England will probably keep interest rates on hold in the short term, but the case for a rate rise could build later this year or, more likely, in 2018 if growth and inflation evolve broadly as we project.
We also show in this report how machine learning techniques can help to estimate (or ‘nowcast’) the current rate of growth of the UK economy in a more timely way than official GDP statistics.
Read on for more details of these findings, or jump to our download section for copies of the full report, summary report, slides and individual articles. You can also explore projections for house prices in your region using our data explorer tool.
Our ‘nowcasting’ model, using machine learning techniques, has performed well in picking up changes in UK GDP growth over the past four years:
The UK economy grew by 2% in the year to Q1 2017, but the quarterly rate fell to 0.2%, primarily as a result of a softening in consumer expenditure and the services sector.
In our main scenario, we forecast UK growth to slow to 1.5% in 2017 and 1.4% in 2018. The UK would avoid recession in this scenario, although risks to growth are still weighted somewhat to the downside given the uncertainties associated with Brexit.
A key factor behind the overall slowdown is a moderation in consumer spending growth to around 2% in 2017 and 1.5% in 2018. This reflects a squeeze on household spending power from higher inflation and sluggish wage growth.
Wage growth continues to be subdued despite the lowest unemployment rate since 1975.
Investment held up relatively well in the first quarter, but uncertainty surrounding Brexit may weigh on this going forward.
We project that London could remain the fastest growing UK region in 2017-18, but its pace of expansion is expected to slow significantly from earlier rapid rates. Other regions are projected to see average real growth in 2017-18 of around 1-1.5%, but we do not predict negative growth in any region in our main scenario.
Consumer price inflation is likely to rise above 3% later this year, but could gradually decline later next year.
The Bank of England faces a dilemma on interest rates due to a combination of slowing growth and rising inflation. We do not expect an immediate rate rise, but a gradual increase is likely to begin at some point over the next 12-18 months in our main scenario.
House price growth has already slowed since the Brexit vote, with transaction volumes well down. We expect house price growth to slow further in the short term, but in the longer term lack of supply could still see property prices rise faster than average earnings.
Until 2014, central London saw the most rapid house price growth, but momentum has now rippled out first to the outer London boroughs and now to commuter belt towns and cities outside London. Our research shows this is typical of patterns seen in past house price cycles.
Our research also shows wide variations in house price trends across the country over the past decade. In around a quarter of UK local authorities, average house prices are still lower than their pre-crisis peak levels in 2007, whereas in London they are more than 60% higher.
See our data explorer below for more details of our projections for house prices in your region.
New research published in this report shows how machine learning techniques (a form of AI) can produce estimates of current GDP growth that are more timely, and not significantly less accurate, than preliminary ONS estimates that are published several weeks later. But these techniques still require significant expert human input – we are some way yet from a fully automated AI system for economic forecasting.
Based on data available up to 7th July, our “nowcasting” model estimates UK GDP growth at around 0.3% in the second quarter of 2017. This would be up very slightly on the first quarter (0.2%), but still some way below the long term historical UK trend of around 0.5% growth per quarter.