The UK’s GDP growth could slow by up to 0.3% over the next two years as the impact of Brexit on the British economy becomes clear.
The prediction, outlined in the National Institute of Economic and Social Research’s (NIESR) most recent report outlining its expectations for the coming years, would see GDP fall from 2% in 2016 to 1.7% in 2017 before recovering slightly to 1.9% in 2018.
Consumer spending is likely to decline as households feel the effects of Brexit-related inflation increases, which will push prices up.
The NIESR expects that inflation will rise to 3.3% this year – well above the Bank of England’s target of 2%.
It is not predicted to return to that level until 2020.
The weak sterling could however provide a boost for trade, as the sharp depreciation of the pound against foreign currencies makes exporting more affordable.
Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: “Robust consumer spending growth was behind the economic momentum of 2016.
“Consumers face significant headwinds this year and next.
“Most notably, the pass through from the recent depreciation of sterling to consumer prices is expected to erode the purchasing power of households this year and next.”
The NIESR said it expected the Bank of England to take the long view on the British economy and look forward to further growth from 2018 onwards, leaving the current interest rate levels unchanged until mid-2019.
The report also looked at predictions for the global economy and concluded that there would be growth over the next two years, but that this would be more modest than previously forecast.
Global economic growth is expected to pick up from 3.0% in 2016 to 3.1% in 2017 and 3.5% in 2018.
But this prediction presumes that current economic policies remain in place.
The NIESR points out that any US policy changes resulting from the election of Donald Trump – and any economic responses from the rest of the world – would “pose significant risks to our projections”.