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Saturday 14th January 2017
Hi Friend,
Forecasts for the UK economy 2017 ...
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In the UK we expect the economy to have grown by 2.1% in 2016 following growth of 2.3% in 2015. Our central forecast is for growth to slow to 1.8% in 2017, with an upside potential of 2.2%. In the US the recovery continues with growth of 2.2% expected in the year ahead following growth of 1.6% in 2016.
We expect inflation to rise early in 2017 prompted by the rise in oil prices and the depreciation of Sterling. The Bank of England expect inflation to peak at around 3% by the first quarter of 2018. NIESR expect inflation to rises to just under 4% be the end of 2017. We expect inflation to rise significantly in the first quarter, ending the year at 2.5%
The service sector continues to underpin growth in the economy. Following growth of 2.5% in 2015, we expect service sector growth of 2.2% in 2016 and 2.1% in 2017. Construction output, driven by developments in housing and infrastructure, increased by 3.4% in 2015. We now expect growth of 0.2% value based in 2016 and 0.3% in 2017.
Manufacturing output remains almost 6% below the peaks registered in 2008 prior to recession. Following an increase in manufacturing output of 2.9% in 2014, output fell by -0.1% in 2015. We expect an increase of 0.3% in 2016 and 0.1% in 2017.
Within the service sector, the leisure sector is expected to show strong growth along with a strong performance in business services, transport and finance. Overall, the UK will experience modest growth in output over the next two years. [We estimate the long term trend rate of growth to be 2.4% following latest data revisions. We do not share concerns about UK productivity.]
Our GDP Expenditure model is consistent and balanced with the ONS data. We forecast GDP(E) growth of 2.2% in 2016 and 1.8% in 2017. We continue to offer little hope for the re balancing agenda in our forecasts for growth in expenditure. Household expenditure increased by 2.5% in 2016. We expect growth of 2.7% in 2016 slowing to 2.6% in 2017. Government expenditure increased by 1.3% in 2015. Government expenditure is expected to have increased by 0.9% in 2016 increasing to 1.2% in 2017.
Net trade will continue to have a negative impact on growth, with exports increasing at a slightly slower rate than imports. We are forecasting a deficit (trade in goods) of £132 billion in 2016, rising to £136 billion in 2017. The deficit trade in goods will be offset by a surplus trade in services of over £90 billion.
The challenge to the current account following the drop in overseas investment income continues, presenting a significant problem to the outlook for sterling over the medium term. We expect the current account deficit to average 5% of GDP in 2017, a level incompatible with base rates at 0.25%.
For more information on jobs, borrowing and interest rates download a copy of the Saturday Economist Economic Outlook January 2017. Just click to download from the main web site.
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Modelling UK trade ... where in the world ?
There are approximately 195 countries in the world with an estimated GDP total of around $75 trillion. We measure the average propensity to import at 25% with a total import value of $18 trillion dollars. UK exports were worth just over $400 billion dollars in 2015. The UK share of world imports was 2.2%. But where in the world did they go? In 2015, the top 50 UK export destinations accounted for 95% of total exports. 46% of UK exports were destined for the EU. But where should they go?
The trade gravity model is used to explain where exports should flow measured as a function of country size and distance. The larger the country and the nearer to shore, the bigger will be the size of exports to that country. Does it work in practice? Yes and no. We find the correlation of UK exports to country size is high at over 75%. If we measure exports as a function of country imports, the correlation rises to over 80%. But what of distance? The correlation is correctly signed but quite low, just over 20%. Size matters in trade!
In the chart, we analyse the UK share of total imports by country. A higher level of penetration is found in Europe! The UK could do better in China, Canada, South America, Russia and India, the areas marked by the red dots. So what are the implications of Brexit?
It will be tough! We already export to major territories around the world. There is no undiscovered magic kingdom behind the wardrobe. It
is true, there is lots of potential to replace dependency on the EU and
sign free trade deals with the rest of the world in theory. The process will take many years of negotiation. If gains elsewhere are made at the expense of trade in Europe, the net gains will be minimal.
Gains in the territories of South America and the ASEAN countries will be hard won. Localised manufacturing will offer the better solution for far off market support. And what of Free Trade with other lands? Be careful that for which you wish. The trade deficit with China increased from £10 billion in 2010 to £25 billion in 2015. Exports require imports to fuel expansion. Without tariff protection, the deficits will soar, even if exports do rise. The UK needs access to the EU single market or the Free Trade Area as a minimum. We are leaving the EU but we are not leaving Europe after all as the PM has explained!
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| Economic news this week ...
Manufacturing output increased by 1.2% in November up from -0.5% in October. Output remains almost 6% below the peak in February 2008. We expect growth of just 0.2% this year, with little growth in 2017.
The trade (in goods) deficit increased to £12.2 billion in November compared to £9.9 billion prior month and £9.6 billion in the same month last year. There is no depreciation dividend as we have long explained. The overall deficit, trade in goods and services, increased to £4.2 billion in the month, up from £1.5 billion prior month and £1.6 billion prior year.
Construction output (volume) increased by 1.5% compared to November 2015. We expect volume growth of 0.3% in the final quarter of the year, up by 1.3% for the year as a whole. Growth in private sector housing and commercial real estate has been offset by reduced activity in public sector housing and infrastructure this year. We expect little to change in the year ahead.
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So what happened to Markets?
Markets, were mixed the Dow closed at 19,881 from 19,988. The FTSE closed at 7,337 from 7,210.
Sterling was down against the Dollar to $1.219 from $1.228 and down against
the Euro to €1.147 from €1.165. The Euro moved up against the Dollar at 1.063 from 1.054.
Oil Price Brent Crude closed at $55.73 from $57.00 The average price in January last year was $37.00.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.37 from 1.39. US
Treasury yields held at 2.42. Gold closed at $1,188 from
$1,173.
John
That's all for this week. Don't miss the Business Conference in March. We focus on Digital Disruption and the Smart City Challenge. Our next economics presentation is on the 9th February in Manchester.
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