UK economy to grow faster than expected, NIESR predicts

Britain's economy will expand faster than forecast in 2017 and 2018 due to unexpectedly strong global growth, a closely followed thinktank has predicted.

GDP growth will accelerate to 1.9% in each of the next two years from 1.8% in 2017, according to the National Institute of Economic and Social Research. The booming global economy and the pound's fall have helped rebalance the UK away from domestic consumption towards net trade as other countries have bought British goods, NIESR said.

NIESR has revised up its forecasts for the UK since November when it expected growth of 1.6% for 2017 and 1.7% in each of the following years. It said that, as well as the buoyant global economy, stronger growth was also due to progress made on Brexit talks, which has lifted some business uncertainty.

The forecaster unveiled its more optimistic figures with divisions opening up in the government over Brexit and world stock markets tumbling – though declines have not yet turned into a crash. NIESR said its revised UK forecast assumes a "soft" Brexit settlement that gives the UK close to full access to the EU market.

Such a deal would leave the UK continuing to pay into the EU budget and with net migration unaffected, NIESR said. If this does not happen and Britain trades under World Trade Organization rules there will be a long-term loss to annual GDP of up to £2,000 for each person in the UK.

NIESR said: "The contribution of the global recovery to the UK has been critical. The forecast for global growth has been raised substantially since the August 2016 forecast, which immediately followed the EU referendum. EU growth, in particular, has surprised to the upside over this period. The squeeze in domestic demand that was caused by uncertainty and an erosion to disposable income was offset by a buoyant trade sector."

Global growth is expanding at its fastest pace since 2011 with the world economy expanding faster than expected at 3.7%, NIESR said. Growth will speed up to 3.9% in 2018 and remain strong at 3.8% the following year as trade expands by 5.4% and then 4.9%, it predicted.

Like other economic forecasters, NIESR has had to rethink its assumptions about the UK economy since the vote for Brexit in June 2016. Soon after the referendum, NIESR said there was a 50:50 chance of a recession within 18 months and that growth would slip to 1% in 2017 in a marked economic slowdown.

NIESR said that after UK inflation peaked at 3% in the final quarter of 2017 it expected the Bank of England to increase interest rates every six months to take rates from 0.5% to 2% by mid-2021.

While NIESR's forecasts require a 'soft' Brexit, Prime Minister Theresa May said Britain would not remain in the customs union after leaving the EU. A spokesperson said: “It is not our policy to be in the customs union. It is not our policy to be in a customs union.”

Furthermore, hopes for net migration to remain unaffected were under some doubt, with the government deciding to shelve release of its plans for a post-Brexit immigration system until after Britain leaves the EU. The influential Confederation of British Industry (CBI) said this would result in businesses being "hugely frustrated".

“From tech start-ups to care homes, not knowing what staff you will be able to access will deter investment," said CBI deputy director general Josh Hardie on Monday.