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Britain to dodge recession but pay to keep getting squeezed

Written by Business World, on 10th Aug 2017. Posted in World

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Britain will avoid recession in the coming year but economic growth is expected to lag the euro zone, a Reuters poll showed on Thursday.

Consumers will feel the pinch from wage increases failing to keep up with rising prices.

It is just over a year since Britons voted to leave the European Union, a decision that has knocked around 13% from sterling's value, in turn driving inflation well above the Bank of England's 2 percent target as imports became more expensive.

Inflation will peak at 2.9% in the last quarter of 2017, according to the poll of almost 70 economists taken this week, but that won't push the central bank to tighten its ultra-loose monetary policy anytime soon.

Bank Rate was cut to a record low 0.25% in the months after the Brexit referendum and won't be lifted until 2019, the poll found.

Consumers played a key role in driving economic growth last year but pay increases have been lagging inflation, something that is expected to continue.

Wages will rise 2.2% this year and 2.5% next whereas inflation will average 2.7% in 2017 and 2.6% in 2018, according to medians. The BoE forecasts wages will rise 3.0% next year.

Reuters polls over the past few months have repeatedly said a disorderly Brexit, where no deal is reached when the two years of talks are due to conclude, would be the worst outcome for sterling and Britain's economy.

Negotiations over leaving the EU have not begun well due to disagreements among Prime Minister Theresa May's team of ministers about the kind of deal they should be seeking, a former top British diplomat said this week.

In the first full round of Brexit talks last month there was little compromise between the two sides on key disputes and the lack of clarity around how the divorce ends has stopped firms from investing.

BoE Governor Mark Carney has said uncertainty about Brexit -- in particular, lower investment by companies -- meant the economy could not grow as fast as before without pushing up inflation.

But the economy is still expected to grow, albeit slowly, and there is a median likelihood of a recession in the coming year of just 20%. Only two economists polled -- at Fathom Consulting and BayernLB -- gave a forecast above 50%.

Britain's economy -- one of the fastest growing among the Group of Seven rich nations last year but now one of the slowest -- will expand just 0.3% per quarter through to the middle of next year, the poll found.

That compares with predicted 0.4% per quarter forecasts for the euro zone. (Reuters)

Source: www.businessworld.ie

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