The Bank of England has dramatically upgraded its growth forecast for this year but stressed that households will still experience a major squeeze on incomes due to rising inflation.
In its latest Inflation Report, the Bank upgraded its 2017 GDP growth forecast to 2 per cent, up from 1.4 per cent in November.
The revision is certain to be seized upon by Brexiteers as evidence that the economy will not suffer from leaving the European Union and that previous economic warnings from the Bank have now been exposed as scaremongering.
Yet the Bank’s forecasts continue to project a growth slowdown in 2018 and 2019, with GDP expected to expand by 1.6 per cent and 1.7 per cent in those years.
The Bank had previously projected that the economy would take a cumulative hit by 2019 of 2.5 per cent of GDP due to Brexit. It now forecasts a 1.5 per cent of GDP hit, equivalent to around £30bn in today’s money.
Despite today’s upgrade the 2017 growth forecast is still below the 2.3 per cent the Bank projected in May 2016, when it was working on the assumption that the UK would vote to remain in the European Union.
“This stronger projection doesn’t mean the referendum is without consequence,” the Bank of England’s Governor Mark Carney said at a press conference.
The Bank ascribed the upgrade to the Chancellor’s infrastructure boost in the November Autumn Statement, stronger global growth, higher stock market prices and cheaper credit for households.
Stronger growth in the final quarter of 2016 also automatically and arithmetically boosts the Bank’s overall 2017 GDP forecast.
But Mr Carney further stressed that the Bank’s decision to stimulate the economy by cutting interest rates and injecting money into the economy last August was part of the reason why the economy was performing better than feared.
“The stimulus is working. The cost of of borrowing is down, availability of credit is up, and some of the uncertainty on households and businesses has been mitigated,” he said.
He added that the monetary stimulus had had “more traction” than the Bank initially estimated.
Despite the GDP upgrade the Bank stressed that households’ incomes would take a hit from inflation this year as rising inflation almost offsets any increase in wages.
The Bank stressed that its central policy trade-off had not changed, and that it was balancing the need to support a slowing economy with the need to be vigilant about the risk of spiralling inflation.
Despite the growth forecast upgrade, the Bank’s inflation outlook was pretty much unchanged, with prices expected to rise 2.7 per cent at the beginning of 2018 and 2.6 per cent at the start of 2019.
Inflation unexpectedly jumped to 1.6 per cent in December according to the Office for National Statistics.
The Bank’s Monetary Policy Committee voted unanimously on Thursday to keep rates on hold at 0.25 per cent, but the minutes of the meeting suggested that “some members” of the nine-person committee were reaching the limits of their toleration for price rises, suggesting that they may soon start to vote for rate rises.
The minutes stressed that the Bank could move “in either direction” on rates, and the direction would depend on the outturn of the economic data.
In the run-up to last June’s referendum Mr Carney, attracted criticism from Brexiteers for warning that there was a risk of a “technical recession” if the UK voted to leave the bloc.
Instead the economy has continued to grow at a rate of 0.6 per cent a quarter, showing no signs yet of a slowdown.
The Bank has admitted that households have carried on spending since the vote, confounding its expectations that they would rein themselves in.
It still expects household spending to slowdown as inflation bites this year and next, although at a less severe rate than previously. The Bank sees the household savings ratio falling as low 3.75 per cent in 2018, the weakest since records were first collected in the early 1960s.
A key judgement in the Bank’s latest forecast is that the UK economy can now support a lower level of unemployment without experiencing inflationary pressure. The Bank now sees unemployment remaining steady at around 5 per cent over the next three years, having previously anticipated it rising to 5.6 per cent.
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