Author: Not mentioned
Posted on: Guardian| November 1th, 2017
Thinktank says it is ‘almost certain’ leave vote has damaged living standards as it scales back economic growth forecasts. British households are each more than £600 a year worse off following the vote to leave the European Union, according to one of the UK’s leading economic forecasting bodies.
The National Institute of Economic and Social Research (NIESR) said it is “almost certain” the leave vote has damaged living standards and hit the growth potential of the economy. The thinktank also scaled back its expectations for growth in the UK for the next three years.
Against a backdrop of improving economic conditions around the world, the UK is expected to record GDP growth of 1.6% this year, down from NIESR’s previous estimate for growth of 1.7%. In contrast, global GDP is expected to grow by 3.5% this year.
The NIESR also revised down the forecast for the rate at which the British economy expands to 1.7% in 2018 and 2019, from 1.9% and 2%, while it expects growth in the following years to be weaker than the average rate achieved before the referendum.
The worrying forecasts come as the Bank of England prepares to raise interest rates for the first time in a decade on Thursday, while they are also likely to trouble the chancellor, Philip Hammond, ahead of the budget later this month.
Threadneedle Street is expected to increase the cost of borrowing from 0.25% to 0.5%, reversing the emergency cut immediately after the Brexit vote.
The hike comes against a backdrop of rising inflation, driven by the weak pound in the wake of the EU referendum – eroding household living standards at a time when wages are failing to edge significantly higher. The NIESR said inflation will peak at 3.2% in the final three months of this year, before settling at 2% in 2020 as the Bank raises interest rates. It expects the cost of borrowing to rise to 2% by the middle of 2021.
Central to the forecasting body’s downgrade in the growth prospects for the UK economy is a more negative view of labour productivity – which has been a persistent puzzle for economists over the past decade. The efficiency of British workers, as measured by economic output per hour worked, has failed to improve in line with expectations since the financial crisis.
According to NIESR, Brexit could make matters worse, with businesses putting productivity-boosting investment plans on hold in the face of uncertainty. NIESR said it now expects hourly labour productivity growth to average just 1% over the next five years, compared with a 1.2% expansion in its previous forecasts.