Photographer: Simon Dawson/Bloomberg

U.K.'s Economy Propped Up by Stronger Global Growth, Niesr Says

  • Trade boost accounted for about one third of 2017 U.K. growth
  • Think tank boosts 2018 forecast to 1.9% from 1.7% previously

The U.K. economy is being bailed out by stronger growth in the euro area and the rest of the world, according to the National Institute of Economic and Social Research.

A better-than-expected global expansion accounted for about a third of the increase in U.K. gross domestic product last year, explaining the nation’s stronger-than-forecast performance in the wake of the Brexit vote, the think tank said in a report Wednesday.

The resulting boost to trade, at a time when future commerce relationships remain uncertain, was “critical” for the U.K. and helped push growth last year to 1.8 percent from the 1.2 percent it would have been without such an uplift, Niesr said.

The stronger world picture was also the primary reason behind the upgrade to its 2018 forecast for the U.K. to 1.9 percent from 1.7 percent, although progress in Brexit talks also played a role. The think tank predicts global expansion of 3.9 percent this year, and has boosted its estimates for the U.S., Japan, Canada and the euro area by more than the 0.2 percentage point increase in the U.K.

Helping Hand

It is “fortunate that at the very moment that we have decided on a path of reorienting trade, the rest of the world offers us a hand,” said Niesr Director Jagjit Chadha. “We are able to benefit from a rather helpful degree of risk-sharing with the fruits of this higher growth, which act to offset some of the effects of trade compression.”

Niesr’s forecast for the U.K., which is considerably higher than the 1.5 percent seen by the International Monetary Fund or the 1.4 percent median estimate in Bloomberg’s latest survey, is conditioned on a so-called soft Brexit, where Britain “achieves close to full access to the EU market.” That also assumes that the U.K. will continue to make a contribution to the U.K. budget and net migration remains unaffected.

Should talks fail, and the U.K. defaults to World Trade Organization trading terms, growth is likely to fall sharply, or even contract, and ultimately lead to a long-term loss in GDP of close to 6 percent relative to its baseline forecast, Niesr said. Under such a scenario, the pound is likely to fall by 10 percent, and the inflation rate jump by about by about 1 percentage point, it said.

For now, Niesr expects inflation to slow from its peak at the end of last year, and reach the Bank of England’s 2 percent target by the end of 2019. The organization reiterated its forecast for two BOE quarter-point interest-rate increases this year -- with the first coming in May -- a minority view that has gained traction in the past month.

Even after a global rout in stocks tempered expectations this week, markets currently assign a more than 50 percent chance of such a move in May. BOE officials may provide more clues on the future path of rates when they present their Inflation Report and latest forecasts on Thursday.

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