NIESR breaks with past and calls for fiscal boost, lowers GDP forecast
One of the country's top think tanks has trimmed its medium-term forecasts for UK growth, making the argument for higher government spending in order to buttress the expansion.
In its updated forecasts, released overnight, the National Institute of Economic and Social Research projected the rate of growth in gross domestic product would slow to 1.4% in 2018, followed by a re-acceleration to 1.7% and 1.8% over the following two years.
They also emphasised that one of the key working assumptions underlying the latest set of projections was for a 'soft' Brexit, meaning downside risks to its forecasts were present should that fail to be the case.
"As before, the central forecast has been conditioned on a 'soft' Brexit assumption where the UK achieves close to full access to the EU market. Although the UK government and the EU have made progress with a transition agreement, there is still a risk that talks fail and the UK ends up trading under WTO rules," they said.
"[...] Because of the dip in economic performance we expect the timing of our next increase in Bank Rate to be delayed to August but reiterate that the MPC should remain on a gentle path of monetary policy normalisation," it added.
The researchers were however at pains to explain that the lowered forecasts did not signal that a prolonged bout of slow growth lay ahead, although they did mean that GDP growth would lag that in the rest of the euro area in 2018 and 2019.
As regards fiscal spending, and in a break with past practice at NIESR, they dropped the assumption that fiscal spending would remain constant over the forecast horizon, predicting instead that it would pick-up from 2019.
"The pressure to end fiscal consolidation is high. Public sector wages are lagging behind the private sector resulting in recruitment difficulties and at the same time concerns about the quality of public services is building," NIESR said.
On a more positive note, the researchers welcomed the tentative signs of improved growth in hourly labour productivity evident in the backhalf of 2017, but chose to be cautious, predicting that it would remain at a "subdued" level of less than 1.5% a year over the medium-term, although there upside risks.
Economists react ... and disagree
Oxford Economics's Andrew Goodwin concurred, telling clients: "There appears to be plenty of scope for rebounds in manufacturing, construction and distribution output in Q2 given the unusual weakness of Q1.
"And with the squeeze on household spending power continuing to ease, the traditional engine of UK growth should start to spark again soon."
Fabrice Montagne at Barclays Research on the other hand believed the Monetary Policy Committee would have its work cut out for it at its next meetings.
It would need to convince markets that the slowdown seen in the first and second quarters was indeed transitory without any data to back-up that prognosis.
"We thought that data would not weaken sufficiently until next year to crack the MPC's hiking conviction. But latest developments seem to show that this is happening sooner rather than later and we have removed our forecast for a rate hike [over the next two years] as we expect the Bank's above-trend growth forecast to be consistently contradicted by incoming data."