UK economy forecast to grow by 1.6% in 2018, says EY Item Club

The UK shows “little sign” of breaking out of the “stunted growth” its seen since the second half of 2017, EY Item Club said in its Spring Forecast.  

The group downgraded its 2018 forecast to just 1.6% GDP growth this year from its previous forecast of 1.7% growth. It forecasts growth to increase marginally to 1.7% in 2019.

This level of growth would be considered “sub-par” by both historical standards and in comparison to the UK’s international peers.

EY Item Club expects that GDP growth in the first quarter of 2018 was around 0.2% quarter-on-quarter and predicts it to increase to 0.5% quarter-on-quarter growth in the second quarter of the year.

Two interest rate hikes this year followed by another two hikes in 2019, EY Item Club forecasts

UK interest rates are currently at 0.5%.

EY Item Club expects the Bank of England to hike interest rates twice this year.

The first hike is expected to take place this May, which will see rates increase from 0.5% to 0.75%, followed by a second hike in November increasing rates from 0.75% to 1.0%.

The group also expects two further increases in 2019.

BoE governor Mark Carney has said it is “likely” there will be a rate rise this year but noted that any increases will be gradual.

“Raising interest rates this year is not an open and shut case,” said Howard Archer, chief economic advisor to the EY ITEM Club.

“With inflation heading down and the BoE’s view of the supply-side of the economy arguably too pessimistic, two rate hikes this year risk exerting unnecessary pressure on consumers.”

However, Archer added that fewer homeowners would be affected by a rate rise because of the growth of fixed-rate mortgages.

“In addition, the burden of interest payments to the average household was at a record low at the end of 2017, and so consumers are in a relatively healthy position to cope with dearer money,” he said.