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The UK economy is expected to expand faster than previously anticipated in 2018 and 2019, as strong global economic growth and a more optimistic outlook for Brexit helped ease worries of a slowdown.

Britain’s think tank the National Institute for Economic and Social Research (NIESR) said on Wednesday that gross domestic product (GDP) will now grow 1.9 percent this year and the next, instead of 1.7 percent.

By comparison, NIESR estimated the world economy to expand by 3.9 percent in 2018 and 3.8 percent in 2019, higher than its November forecasts of 3.6 and 3.5 percent.

The organization cited both positive global outlook and progress in Brexit talks for the upbeat adjustments, stating that global recovery has made a significant contribution to the UK.

Economist Amit Kara said that the UK is currently working on rebalancing. NIESR stated a weaker pound and optimistic global demand for goods and services was helping with that, and they expect the country’s economy to rebalance away from domestic demand and towards a stronger net trade.

A Soft Brexit

The institute’s forecasts were also reliant on a soft Brexit, where the UK can have close to full access to the European Union (EU) market. This could mean that the country will keep on contributing to the UK budget and net migration would remain unchanged.   

Kara stated that a bespoke agreement is possible, but may need trade-offs. However, given that it is a political judgment, there is a big room for doubt.

The economic researcher also believed that the government will be the one paying for access to EU’s markets.

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Nonetheless, the main risk to the health of the UK economy is still the potential failure in Brexit negotiations, after which the country would continue trading under the World Trade Organization’s terms that could incur higher tariffs.

As a result, economic expansion will then decline sharply, eventually leading to a possible GDP loss of about 6 percent by 2030 due to weaker exports and poor productivity growth. This would leave citizens in Britain an average of £2,000 ($2,790) a year.

Wage Growth May Threaten UK Economy

Higher wages was also seen as another potential threat to Britain’s economic growth.

If the increase in the National Living Wage and a rise in public sector pay lift wages without any corresponding improvement in productivity, inflationary pressures could grow, pushing BoE to hike rates, thus hindering GDP expansion.   

NIESR still expects Bank of England (BoE) to go on with policy normalization by raising bank rate by 25 basis points every six months until it the policy rate achieves 2 percent in mid-2021.

The institute also said that the BoE would probably hike interest rates in May and again within six months.

Markets currently assigned over a 50 percent chance that the bank would hike rates in May. The bank’s officials may be able to shed more light about the future course of rates during their inflation report and new forecasts statement on Thursday.

NIESR expects inflation to slow by 2.4 this year and reach the bank’s 2 percent target next year. The estimates were mostly unchanged from November.

As the impact of a weaker pound fades from its system, inflation is likely to shrink this year and is expected to help boost consumer spending.

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