Analysts claim that the UK economy is expected to get a stronger hit from the Brexit with price growth surpassing pay growth in 2017. Do you share this point of view or not? Why?
© Sam Lynton-Brown
We think that growth will soften a little bit over the course of this year. Our economists forecast economy will expand 1.8% in 2017, though we think that we are going to see real weakness in 2018, with our growth expectations dropping off to just 1%. Furthermore, as you correctly highlighted, the principle driver for this decrease is likely to be a squeeze in real disposable income; nominal wages will rise slower than prices will and so consumption will fall as real income squeezes.
The Bank of England sees a less optimistic trend in household spending. As a result, this may prompt the BoE to increase monetary stimulus to spur demand. In your opinion, are these projections reasonable? Should we expect a further slowdown in the UK economy?
We do not think the Bank of England is going to ease their monetary policy further. They may still be concerned about growth and they also have the inflation mandate, worries over which, to our mind, is likely to result in the Bank of England not easing policy anytime soon. Nevertheless, we would say that the risk is that if the Sterling depreciates more than the Bank of England expects, we could see inflation in the UK significantly overshooting the BoE's target.
What are your forecasts for GBP/USD and EUR/GBP for the end of the year?
Our forecast for the Cable is that the pair is going to remain at the current level and then it will be most probably pushed a little bit higher over the coming month. In a longer term, we expect to see a range of around 1.24-1.25 by the end of this year.
As to the EUR/GBP currency pair, we think we could witness a much greater decline. At this point, we forecast a fall to 80 cents by the end of this year, which is a reflection of our bearish views on EUR/USD, which we see nearing parity this year.