UK economy set to grow 1.7% in 2017 as world trade grows

The UK economy is set to grow by 1.7% this year, according to a new report by the World Bank, up from a forecast of 1.2% in January – though down 0.1% on 2016.

UK quarterly growth was 2.0% for Q1 2017, up from 1.9% in Q4 2016.

The figures come on the back of strengthening global growth, predicted to reach 2.7% in 2017, up from 2.4% in 2016.

Eurozone growth

Eurozone growth is also predicted to rise by 1.7% this year, down slightly from 1.8% in 2016. Both the UK and the Eurozone are predicted to see growth of 1.5% in 2018.

According to the World Bank’s June 2017 Global Economic Prospects report, overall growth in advanced economies is expected to accelerate to 1.9% in 2017.

The World Bank’s Global Economic Prospects report says the global upturn is due to an improvement in manufacturing and trade, rising market confidence, and stabilising commodity prices.

Growth in emerging market and developing economies as a whole will rise to 4.1% this year from 3.5% in 2016, while global trade growth has surged to 4% after a low of 2.5% last year.

UK forecast

The UK’s short-term forecast upgrade reflects unexpectedly resilient activity around the turn of the year, according to Franziska Ohnsorge, lead economist of the World Bank’s Global Economic Prospects group.

“For the medium-term, our forecast upgrade to the Euro area, which is the UK's main trading partner, is expected to have marginally positive spillovers to the UK, despite uncertainties related to Brexit discussions,” she said.

“Possibly the most important risk to UK growth in the next two years arises from the possibility of unexpected events around the Brexit negotiations.

“In addition, since the UK is a highly open economy, it remains vulnerable to adverse events in global financial markets – whether they are related to monetary policy developments in major advanced economies, a credit event in one or more large emerging markets, or a shock to global risk sentiment – and to disappointing growth in major economies.”

Consumer slowdown

The World Bank report came out on the same day the UK’s PMI figures – an economic barometer – for the service sector showed a fall to a three-month low of 53.8 in May.

“Business-to-business activity was reportedly limited to some extent by increased economic uncertainty and wariness ahead of the general election, while consumer-facing services sectors continued to be hampered by squeezed household budgets," said Howard Archer, chief economic adviser to the EY Item Club.

He said he was expecting UK growth to slow next year to 1.2%, lower than the World Bank forecast of 1.5%.

“That’s partly because of the squeeze on consumers still being significant,” he said. “I think there will also be heightened expectation affecting businesses as Brexit negotiations come more and more to the forefront.

Brexit negotiations

“We’ve been involved in the phoney war so far, but the Brexit negotiations are due to start on 19 June and I think in the first few months in particular you are going to get a lot of posturing on both sides.”

He said there were likely to be confrontational headlines over the Brexit negotiations that would affect business behaviour.

“Obviously sterling is at a very competitive level compared to the euro as well as the dollar – how much the UK economy grows depends on how much the export sector can make up for a softer domestic sector,” he added.

Meanwhile Viral Patel, research analyst at Currency Solutions, one of Europe's leading non-bank providers of currency exchange payment services, noted that while the UK’s services PMI in May was lower than expected, the manufacturing and construction PMIs both beat analysts’ expectations.

“Despite inflation increasing to a four-year high of 2.7%, retail sales have remained resilient, growing by 4.5% in April, suggesting the UK economy may not be affected by rising prices as some may have expected,” he said.