Brighter forecast for UK economy thanks to global growth and Brexit progress | Business | Economy and finance news from a German perspective | DW | 07.02.2018

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Brighter forecast for UK economy thanks to global growth and Brexit progress

The world economy is growing fast and according to a respected UK economic forecaster, that is behind an improved British growth forecast. As ever though, the outcome of Brexit decides all.

A leading economic forecaster says the UK economy will recover well in 2018, thanks to a strong global economy and a relative easing of concerns over Brexit.

The National Institute of Economic and Social Research (NIESR), Britain's oldest independent economic research institute, has revised its growth forecast upwards for the UK economy and is now predicting GDP growth of 1.9 percent in both 2018 and 2019.

"The upward revision to our growth forecast primarily reflects a more positive outlook for global growth and to a lesser degree is also a response to the progress in Brexit negotiations," the institute noted in a statement.

Referring to the successful completion of "phase one" of the EU-UK Brexit talks in mid-December, the NIESR said that had "helped lift some of the uncertainty that has weighed down on business investment."

In terms of the buoyant global economic conditions — and the fact of a weakened pound (£)— it said that the resultant situation of UK net trade "will continue to make a sizeable contribution to economic growth, helping the economy rebalance away from domestic demand over the next two years." 

The forecast of almost 2 percent growth in 2018 is considerably more optimistic than that of other forecasters, such as the World Bank and the International Monetary Fund, which recently predicted UK 2018 growth rates of 1.4 percent and 1.5 percent respectively. It's also much brighter than the leaked UK government forecast, reportedly on recently.

It's Brexit, stupid!

However, the NIESR report acknowledges that the forecast is based on particularly sunny estimates of how Brexit ultimately turns out.

While the first phase of talks did conclude serenely enough at the end of 2017, considerable doubts remain on both the Brussels and London sides over the final outcome, with plenty of uncertainty remaining over the Irish border and the type of trading relationship the UK and EU will have after March 2019, when the UK officially leaves.

"The central forecast has been conditioned on a 'soft' Brexit assumption where the UK achieves close to full access to the EU market," the report notes.

Read more: UK economy unfazed by Brexit worries, for now

"That high level of market access will, in our view, come at a cost. We assume that the UK continues to make a budgetary contribution to the EU as before and net migration remains unaffected."

EU-Gipfel Brexit Theresa May

The report makes clear how critical the outcome of Brexit is to UK economic well-being.

While the overall tone of the assessment is optimistic, the report makes strikingly clear just how critical the outcome of Brexit is to overall UK economic well-being.

In a "no-deal" scenario, whereby the UK reverts to World Trade Organization (WTO) trading rules, the NIESR predicts that UK citizens would suffer an annual GDP loss of up to £2,000 ($2,782 or €2,252) per person —equating to around 6 percent of current figures.

The bleakness of such a scenario has been reflected in other assessments. A November analysis by the Bank of England found that if a messy Brexit was combined with a global recession, UK banks would likely go under.

Global Britain?

However, despite recent stock market dips, a world recession looks a way off and it is the currently bright global outlook which underpins this new optimism for the UK

The global recovery has been "critical" to the latest outlook the report says, having already helped raise several forecasts since the initial aftermath of the June 2016 referendum. "Had global growth remained in line with that forecast (made just after the referendum), UK economic growth would have been around 1.2 per cent in 2017 instead of 1.8 percent," the report states.

Taking an interest

The NIESR expects the Bank of England to raise UK interest rates in May and to do so every six months thereafter, in an expectation of continuing normalization of lending and borrowing conditions.

Watch video 01:36

The growing global economy

Consumer spending has fallen in the UK, while inflation is also predicted to fall in 2018. However, the improved performance of exports has helped "rebalance" the UK economy away from domestic only issues, the report notes.

The report also includes a global forecast. Noting that the world economy is growing at its fastest rate in almost a decade, the NIESR has revised its global estimates upward and predicts growth of 3.9 percent in 2018, up 0.2 from 2017.

However, concerns are also noted over high levels of global indebtedness, increasing talk of protectionism in international trade and over geopolitical tensions.