The UK economy may slow down in the next couple of years, even while the world economy picks up, a report says.
The National Institute of Economic and Social Research (NIESR) revised up its forecasts for UK growth to 1.7% this year and 1.9% in 2018.
However, both would still be a slowdown from the growth rate of 2% recorded for 2016, when the UK was the world’s fastest growing developed economy.
NIESR predicted inflation would rise too, hitting household spending.
“Robust consumer spending growth was behind the economic momentum of 2016,” said Simon Kirby, head of macroeconomic modelling and forecasting at NIESR.
He said households would see their purchasing power “eroded” this year and in 2018 due to sharply rising prices.
The NIESR, widely seen as the UK’s oldest independent research body, thinks inflation will jump from an average of 1.2% recorded over the course of 2016, to 3.3% this year then back down to 2.9% in 2018.
Price rises will be stoked, the body argues, by the sharp devaluation of the pound after the UK’s Brexit vote last June.
The institute thinks the Bank of England will ignore this “temporary” pick-up in inflation and keep interest rates unchanged at their current historic low point, of just 0.25%, until the middle of 2019.
The Bank of England will announce its latest decision on interest rates on Thursday.
All this will be against the background of a more robust world economy, the NIESR forecasts.
It believes the world economy will grow at a faster pace in the next couple of years, with the annual growth rate rising from 3% in 2016 to 3.1% this year, and then to 3.5% in 2018.
But it warns that its predictions could be thrown off-kilter by any sudden changes in economic policy in the US, following President Donald Trump’s election.
“Our forecast assumes established policies,” the NIESR says.
“Potential policy changes in the US and any response in the rest of the world therefore pose significant risks to our projections.”