The UK economy has performed surprisingly well last year, even though the OECD could hardly find a better performer on key metrics based on growth and employment.
However, looking across the surface, the UK economy is, in fact, overheating. Given this situation, it would likely fall into the largest surge of inflation for over years, tightening household budgets and placing the Bank of England (BoE) under pressure largely because of its own making.
Already weak prior to the unexpected Brexit referendum result, the pound sterling sharply declined and has not recovered since. Year over year the sterling slashes 20% against the dollar and the euro.
Together with the significant 70% rise in oil prices over the same time frame, both UK energy and food costs are expected to rally this year, which will likely boost UK consumer price index by around 1 to 2 percentage points.
Economists claimed that it may not seem so much, considering that CPI stood only at 1.2% year-over-year. Additionally, over the years of low wage growth, the unit labor costs started to sharply increase last year, partly led by rising wages and a persistent weak productivity growth.
IMF Raises UK Growth Forecast
The International Monetary Fund (IMF) has raised its estimate for the UK’s economic growth this year, fueled by a well-performed economic results since the Brexit vote.
The IMF is expecting the UK to post a 1.5% growth this year, compared with the previous forecast of 1.1%.
Subsequently, its 3.4% growth forecast for the global economy in 2017 and a 3.6% in 2018 remained unchanged.
"Preliminary third-quarter growth figures were somewhat stronger than previously forecast in some economies, such as Spain and the United Kingdom, where domestic demand held up better than expected in the aftermath of the Brexit vote," said the IMF in its latest World Economic Outlook.
It added: "There is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming US administration and its global ramifications."
For 2018, the organization’s forecast for UK economic growth has been lowered from the previous reading of 1.7% last October to 1.4%.
Given that IMF forecasts always have to contradict with uncertainty, the likelihood of it has been particularly pronounced this time, citing reasons of political change that is set later this week in Washington.
In essence, investors will closely watch on Trump’s inauguration and wait on what policies will his administration seek, which would be much clearer next time the IMF issues a forecast in April.
So for now, the economists initially had to make some speculations.
However, it is widely anticipated that a boost to the US economy could persist driven by government finances such as cutting taxes and infrastructure investments.
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