UK growth forecasts edge up as jitters ease

A London bus passes the Bank of England in London. Photo / AP

Britain's economy will grow faster than expected in 2016 and 2017, as newly optimistic economists reverse some of the downgrades made immediately after the Brexit vote.

A raft of strong economic data published since the vote has persuaded some analysts that a devastating economic crunch - predicted by then-chancellor George Osborne - is unlikely to strike the UK in the short term.

City economists now believe the UK will grow by an average of 1.6 per cent this year and 0.7 per cent in 2017, according to the Treasury's latest study of forecasts.

That is still a slowdown from growth of 2.2 per cent last year, but is a marginally better outlook than the 1.5 per cent and 0.5 per cent average forecasts a month ago.

Barclays increased its 2016 forecast sharply from 1.1 per cent to 1.5 per cent, in part because of the strong second-quarter GDP figures, which show growth accelerated before the June 23 referendum.

Citigroup increased its prediction for 2016 from 1.3 per cent to 1.7 per cent, while Commerzbank's economists hiked their forecast from 1.2 per cent to 1.6 per cent.

The forecasts add to a week of unexpectedly positive news, which indicated any economic slowdown would not be as severe as analysts had first thought.

Unemployment fell in the run-up to the vote and in the month after. Unemployment is at its joint-lowest rate since 2005 at 4.9 per cent. Consumer spending increased strongly as shoppers bought 5.8 per cent more in July than a year earlier, giving hope to firms that had put investment plans on hold because of Brexit jitters.

"Most firms in the UK are domestically focused, so if the consumer sector is looking good, then the feared hit to investment might not be as great as was expected," said economist Martin Beck at the EY Item Club.

Economists believe earnings will grow by 2.4 per cent this year and accelerate to 2.5 per cent next year - both figures slightly up on last month's forecasts. However, rising prices may eat into households' spending power.

Despite the optimism some economists remain gloomy, indicating the scale of uncertainty still surrounding the referendum's impact on growth.

Nomura believes inflation of 2.1 per cent will outstrip weak pay growth of 1.2 per cent next year, and that the economy will shrink by 1.2 per cent in 2017. It believes more uncertainty and a fall in the housing market could have a knock-on effect.

"This week's numbers don't affect my view," said Nomura's Philip Rush. "Asking prices for houses are [easing] without many new listings, and ... this should feed consumer caution."

The Office for National Statistics will update its estimate of second-quarter growth this week.