The National Institute of Economic and Social Research (NIESR) has cut its 2018 growth forecast for Britain to 1.4 per cent from previous forecast as the economy grew slower in the first quarter (Q1).
The think tank cut the growth forecast to 1.4 per cent from a February estimate of 1.8 per cent, after official figures showed the economy grew just 0.1 per cent in the Q1, NIESR said on Friday.
“It’s not clear at this stage if it’s a soft patch or the start of a prolonged period of weakness. Our central forecast assumes that economic growth recovers,” NIESR economist Amit Kara said.
This uncertainty means the Bank of England - which also expected 1.8 per cent growth this year - is likely to delay raising interest rates next week in favour of August, Kara said, and then raise rates roughly every six months thereafter, reports Reuters.
The downgrade puts NIESR’s forecast below the 1.6 per cent predicted by the IMF last month and the 1.5 per cent average forecast from financial market economists polled by Reuters.
NIESR expects growth in future quarters to average 0.4 per cent, and its prediction for 2019 - when Britain will formally leave the European Union - is less changed at 1.7 per cent versus 1.9 per cent three months ago.
It assumes Britain’s trading relationship with the EU will remain “close but not frictionless”.
However, unfavourable Brexit developments might cause slower growth and higher inflation, as could further disappointment on productivity.
Chancellor Philip Hammond was also likely to give ground on his plans to cut public spending further, as he faces growing pressure to raise public-sector pay after years of real-terms cuts.
“Expenditure cuts have gone too far. We do not believe they are sustainable. We believe that there is austerity fatigue,” Kara said.
Rather than returning to surplus, as Hammond intends, the budget deficit was likely to remain around 2.0 per cent of GDP as public spending held steady as a share of national income, NIESR predicted.