The International Monetary Fund cut its economic growth forecast for the U.K. as uncertainties surrounding Brexit weigh on private consumption.
Total output is expected to grow by 1.6% in 2017, slightly down from the forecast for almost 1.7% growth contained in its October World Economic Outlook, as higher consumer price inflation, which reached 3.1% in November, squeezes household real income and consumption. Weak consumer demand was partially tempered by a rise in goods exports, supported by robust external demand and weaker sterling. Economic growth is expected to slow further to 1.5% in 2018. The IMF projects a gradual decline in inflation but for it to remain above target, implying further pressure on real wages and private spending.
The Bank of England raised rates for the first time in 10 years in November. A gradual withdrawal of monetary stimulus would help lower inflation back to the 2% target as the effect of previous sterling depreciation fades, the IMF said.
The U.K. and the EU announced a deal on Brexit's "divorce terms" in negotiations on Dec. 8, ushering in the second phase of talks which will center on trade. The IMF said that companies are likely to continue delaying some investment plans until the U.K. and the EU reach an understanding on future trading relations. Brexit is also poised to influence the structure of the British economy as changes in the trade framework, regulatory structure and labor market affect agriculture, manufacturing and services , it added.
The IMF warned that a breakdown in negotiations could result in a disorderly Brexit and sharp declines in asset prices. Additional sources of risk to the outlook include compressed risk premia and a decline in liquidity in the corporate bond market, still-high valuations of commercial real estate and to a lesser extent housing, and a low household saving rate.