Ratings agency predicts interest rates will be on hold for next two years, and outlook could be worse if Brexit talks go badly.
Britain’s economy will lose momentum both this year and next as the squeeze on living standards caused by higher inflation outweighs the benefits of the cheaper pound on exports, one of the world’s leading rating agencies has predicted.
Standard & Poor’s said that after holding up much better than predicted in the period immediately after the June 2016 EU referendum, the UK’s growth rate would slow from 1.8% in 2016 to 1.4% in 2017 and 0.8% in 2018.
The rating agency warned that the outlook for the economy might be even worse than it was predicting if the Brexit talks between Britain and the EU went badly.
Despite speculation of an increase in interest rates from the Bank of England next month, S&P said the weakness of the economy would result in borrowing costs being left on hold at 0.25% for another two years.
The agency’s senior economist, Boris Glass, said: “Given demand weakness, the temporary nature of imported inflation, moderate domestic wage pressures, and Brexit uncertainties, we expect the Bank of England’s current ultra-accommodative stance to continue over the medium term and expect a first rate hike to occur only in mid-2019.”
S&P said the better-than-predicted performance of the economy in 2016 had been the result of “extraordinarily robust consumer spending” but added that the pressure on households from prices rising more rapidly than wages was likely to persist for the rest of 2017 and into 2018.
The depreciation of the pound would make UK exports more competitive but would only add between 0.2 and 0.3 percentage points to growth from 2017 to 2020.
“Our forecasts for slower growth are subject to considerable downside risks, stemming mainly from Brexit uncertainties,” Glass said. “For example, the staging of the negotiations, with the ‘divorce’ settlement being negotiated before any future relationship with the EU is addressed, means that should the separation negotiations stall, there would be less time left for negotiating the future trade relationship, risking a cliff edge.
“In general, should negotiations stall for an extended period, this could translate into a further significant depreciation of sterling and a consequent rise in inflation.”
Ben Broadbent, one of the Bank of England’s deputy governors, said a sharp drop in UK trade with the EU after Brexit would be bad for the economy.
In a speech in Aberdeen that focused on the benefits of international trade, Broadbent said: “Put simply, a significant curtailment of trade with Europe would force the UK to shift away from producing things it’s been relatively good at, and therefore export to the EU, and towards the things it currently imports and is relatively less good at.”
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