Northern Society of Chartered Accountants

Q4 UK ICAEW Economic Forecast 29 December 2017

The Q4 2017 ICAEW Economic Forecast, is based on the views of those running UK plc: ICAEW Chartered Accountants working in businesses of all types, across every economic sector and in all regions of the UK, surveyed through the quarterly ICAEW Business Confidence Monitor (BCM).

ICAEW continues to work with Oxford Economics to issue quarterly reports which provide useful insight and timely intelligence for finance professionals and their clients.

The ICAEW Economic Forecast considers the outlook for the UK economy.

Q4 Key findings:

We forecast GDP growth of 1.5% in 2017, rising modestly to 1.6% in 2018
Recent data suggest the squeeze on consumers has continued, while manufacturing and exports have provided only a slight encouragement to activity. With these trends set to continue into 2018, and little movement likely on either fiscal or monetary policy, we expect GDP growth to remain slow by historical standards next year.

Productivity constrained by weak investment intentions.
Output per hour grew in Q3 2017 at the fastest rate since 2011, but this was entirely driven by a reduction in hours worked, rather than an improvement in productivity. Measures set out in the Autumn Statement could yield longer-term productivity gains, but the ongoing uncertainty over Brexit will constrain business investment again in 2018.

Slower jobs growth means unemployment rate stabilises.
After a solid first half of 2017, the rate of job creation slowed markedly in the third quarter, with total employment down modestly, but the unemployment rate remaining at a 42-year low. We think the private sector can continue to create jobs into 2018, but at a slower rate, and constrained by shortages of skilled labour in some sectors. The unemployment rate and pace of nominal wage growth are both forecast to be relatively stable over the coming year.

Weaker pound helping manufacturers.
After a few quarters when a weaker currency seemed only to bring higher costs to manufacturing and exporting businesses, input cost pressures have started to ease and competitiveness has been improving in recent months. The ICAEW Business Confidence Monitor® (BCM) evidence suggests an expansion in export growth for manufacturers in 2018, although obviously risks from a “no-deal” Brexit remain.

Economic outlook

We forecast GDP growth of 1.5% in 2017, rising modestly to 1.6% in 2018.

The economy picked up a little momentum in Q3, with growth of 0.4% (0.1 percentage point higher than each of the previous two quarters). Within this, the broad pattern of growth tilting from services toward manufacturing continued. Retail sales expanded at a rate which is slower by more than half a percentage point than the quarterly average through 2016. Manufacturing output, though, spurred by the weaker pound, rose by 1%, the best performance since Q4 of last year (see focus section).

Looking into Q4, monthly data suggested that the services sector gathered some momentum in October – although interpreting October’s retail sales data is complicated by an unusually strong October 2016. Meanwhile, although retail sales volumes in October fell versus a year earlier (the first such occasion for over four years), this largely reflects the 2% month-on-month jump in October 2016, rather than especially weak monthly data in October 2017 itself. Nevertheless, with inflation edging up to 3% in September and October, consumer spending growth will remain constrained. We forecast GDP growth of 1.5% for 2017 overall.

The squeeze on household finances will persist into 2018, with the Bank of England’s recent base rate increasing debt servicing costs for some households. With business investment remaining constrained (see next section) but support predicted to come from better trade performance, we forecast GDP growth at 1.6% in 2018. Major changes in macro policy seem unlikely in the coming couple of years however. The Autumn Statement contained little in the way of major fiscal measures outside of those aimed at the household sector, with the focus mainly on reducing the deficit against a backdrop of weaker OBR growth forecasts. Meanwhile, the MPC’s statement following November’s rate hike did not suggest that they will be tightening again anytime soon.

Read more

You can read more about the ICAEW Economic Forecast on icaew.com

ICAEW’s forecasts for economic growth, business investment and the outlook for the labour market are based on the correlation between ICAEW Business Confidence Monitor (BCM) indicators and official economic data. The BCM contains data – from a survey of 1,000 UK businesses – on business confidence, financial performance, challenges and expectations for the year ahead to provide a unique analysis of future developments in the UK economy.

About Northern Society of Chartered Accountants

Northern Society of Chartered Accountants (NorSCA) represents ICAEW members working in business and the finance profession across the North East of England, Teesside, Northern Yorkshire and Cumbria. We have been assisting businesses in the north of England and producing chartered accountants for over 130 years.