A leading economic think-tank is predicting that the UK economy will recover in the second half of 2017 after its sluggish start to the year, and bounce back to a GDP growth rate of almost two per cent in 2018.

Potential for increased interest rates in spring 2018

The upbeat forecast from the National Institute of Economic and Social Research (NIESR) also suggests the economic recovery will prompt the Bank of England to raise interest rates next spring – more than a year earlier than its previous projection.Despite growth of only 0.3 per cent in the second quarter and 0.2 per cent in the first, NIESR is predicting GDP growth will still reach 1.7 per cent this year thanks to a second-half bounce, and hit 1.9 per cent in 2018.“The economy has slowed each year since 2014 and, according to our forecast, 2017 will mark the trough for GDP growth,” NIESR said. “Thereafter, we envisage a modest recovery that takes economic growth to a level that is close to potential.”The forecast says a boom in exports after the fall in the value of sterling and a return to real wage rises next year will be enough to increase GDP growth and convince the Bank of England to increase the cost of borrowing.Jagjit Chadh, the institute’s director, said an interest rate rise would have the effect of supporting efforts by high street banks to boost both their profits and the reserves needed as a defence against another financial crash.“We are not talking about a rapid return to higher interest rates, but signalling that process – even if it takes five to seven years – will help banks rebuild their balance sheets and create a healthier financial system,” he said.

CBI reports increased output among small and medium businesses

Publication of the report coincided with one from the Confederation of British Industry (CBI) showing that output among the UK’s small and medium-sized (SME) manufacturers grew in Q2 at its the fastest pace in seven years.Yet despite the growth in orders – with export orders the highest since April 2011 – optimism about the current business environment was broadly flat among the survey’s 364 respondents.And while employment “rose at a robust rate and hiring intentions for the next quarter remain solid”, companies voiced concerns that skilled labour shortages might limit output in the near-term.

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Related stories:

• UK inflation rate in surprise fall in June
• IMF confident of Eurozone growth – not so for US and UK
• UK economy still sluggish despite services pick-up

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Alpesh Paleja, CBI principal economist, commented, “It’s encouraging that activity among SME manufacturers has risen strongly over the past three months. Firms are clearly in an exporting sweet spot, able to exploit the competitiveness gains from a low exchange rate and a firm global backdrop.“But the boost from a lower exchange rate will fade over time, so maintaining frictionless and tariff-free trade routes with the EU will be critical for future exporting success. This is particularly true for SMEs, as preparing for the UK’s exit from the EU is significantly more difficult for smaller companies facing greater pressure on their resources.“There are clearly other concerns on SMEs’ minds too, notably labour shortages, demonstrating the need to continue accessing talent from overseas while pursuing home-grown skills development as part of a meaningful industrial strategy.”Meanwhile, the British Retail Consortium (BRC) reported food prices had fallen back in July from the three-and-a-half-year high recorded in June thanks to a minor recovery in the value of sterling.Helen Dickinson, BRC chief executive, said, “July saw lower food price inflation than in June, bringing the march of overall shop prices towards inflationary territory to a halt, for now at least.“Lower food price inflation in July was, in part, the result of the easing of upward pressure from the currency depreciation on fresh food.“Shorter stock cycles in fresh food mean that more of the impact of the currency depreciation fed through into inflation earlier in the year and hence it is now subsiding.“However, the upward pressure on food inflation has not entirely disappeared, ambient food prices are still affected and as seasonal pricing dynamics play out, we could see fresh food inflation pick up again.”For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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