Economic clouds looming despite strong finish to 2016

Key data this week is set to highlight that the UK economy ended last year in much better shape than feared after June's Brexit vote '“ but economists remain virtually unanimous that a tougher 2017 lies in store.

The manufacturing sector has proved resilient since the Brexit vote. Picture: Andrew Milligan/PA Wire
The manufacturing sector has proved resilient since the Brexit vote. Picture: Andrew Milligan/PA Wire

“I think the opening months of this year will be the calm before the storm for the UK economy, there are just too many negative pressures,” one City economist said. “But I think we will have this week’s shot of good news first.”

Purchasing managers’ data is due from research firm IHS Markit on Britain’s manufacturing sector tomorrow, construction on Wednesday and the much bigger services sector – accounting for about three-quarters of the economy – on Thursday.

Services and manufacturing in particular are expected to confirm a swathe of figures since the EU membership referendum that the economy has been resilient, even as sterling plummeted to 30-year lows against the US dollar in the aftermath of the vote.

Consumers have been particularly buoyant, with retail sales growing strongly in October and November, although the spotlight will also now swing on to a stream of retailers posting their festive trading updates this month starting with fashion retailer Next on Wednesday.

However, most City economists believe the UK economy will slow down sharply in the coming year, with a consensus figure for GDP of about 1.3 per cent compared with an estimated 2 per cent in 2016.

Howard Archer, chief UK and European economist at IHS Global Insight, who is forecasting GDP of 1.4 per cent for this year – the weakest for five years.

“Despite a seemingly ongoing resilient performance at the end of 2016, 2017 is likely to be an increasingly difficult year for the UK economy,” he said.

Archer added that macro-uncertainty would be sharpened when Theresa May triggers Article 50, expected in the early spring, that begins divorce proceedings with the EU.

He forecast that consumer fundamentals were set to “weaken markedly” as the year progressed and shoppers were faced with diminished purchasing power “as inflation rises appreciably and earnings growth is limited by companies striving to limit their costs”.

Samuel Tombs, economist at research firm Pantheon Macroeconomics, said business investment was also likely to slacken as Article 50 was triggered. “It all points to a slowdown,” he said.

Most economist believe any monetary tightening this year from the Bank of England will be minimal or non-existent from its historical interest rate lows of 0.25 per cent since last August.

Archer said that the Bank’s monetary policy committee will be “pretty tolerant” of any overshoot of inflationary targets as it would also have to weigh what a rate rise would do to an uncertain economic backcloth.