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Industry Insights

A concise review of the British economy in 2018

Following Mr Hammond’s Spring Statement, we look back over the financial year to bring you a condensed review of the British economy, considering where we’re at now and the predictions for the coming months.

After the EU referendum result the economy has not been as weak as first predicted, but we are still treading through uncharted territory and the UK economy may see changes depending on the final deal we manage to secure. For now, we look to 2018…

What’s happened so far

Growth

Looking back to the end of 2016, it was thought that growth would slow down significantly due to the result of the EU referendum. However, growth hasn’t slowed as expected and, in fact, the UK economy exceeded expectations in 2017. The chancellor stated in the Spring Statement 2018 that the growth forecast has been revised from 1.4% up to 1.5% for the year because of this. The forecast for 2019 and 2020, however, has been left unchanged at 1.3%. This is due to the UK departing the EU in March 2019.

Inflation

Due to the weak pound after the referendum result, prices rose at rapid rates during 2017, and it was said inflation probably peaked above 3% at the end of the year. However, the Spring Statement 2018 has forecast inflation to fall from the current 3% to 2% by the end of the year – a step in the right direction.

Spending and Borrowing

UK public debt is still too high. However, it was revealed in the Spring Budget that borrowing has fallen by three-quarters since 2010 and is expected to fall over the next year. Employment increased last year and, since 2010, has increased by 3 million. This will have a positive impact on both spending and borrowing.

Government spending, as a share of GDP, was brought down from 44.8% in 2010-2011 to 39% in 2016-2017. It is important that public spending is controlled due to the level of debt still being too high. Mr Hammond stated in his Spring Statement, that £1.5bn has been allocated so far to different departments in preparation for Brexit next year, and £1.67bn given to London to build 27,000 affordable homes by 2021-22.

This April, the national living wage will rise to £7.83 an hour, which should also have a positive effect on spending and borrowing.

Predictions for 2018

Although 2017 saw a tight squeeze in UK households due to inflation and the weakened pound, it is slowly recovering with inflation predicted to be down to 2% by the end of the year. Over the next five years, inflation is expected to continue falling and wages are expected to rise at a quicker pace than prices.

Although the growth forecast has had a positive revision with an increase to 1.5% for 2018, it is still at 1.3% for 2019-20. There are no current certainties for the UK economy after we leave the EU, but we hope in the Autumn Budget 2018, we will have a clearer picture.

With unemployment close to a 40-year low, this will naturally have a positive effect on the economy as people have more money to spend and less need to borrow.

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