Wages and investment set to slow in 2017

We have today upgraded our UK economic forecast from 1.8% to 2.0% in 2016, and from 1.1% to 1.2% in 2017.

These revisions reflect a stronger-than-expected third quarter of 2016; however, the underlying outlook for the economy has changed little, with businesses still waiting for clarity over the post-Brexit trading environment before investing.

Business investment expected to decline

We expect business investment to fall 1.3% in 2016, and a further 2.4% in 2017, following an average growth of 5% per annum from 2010-2015.

As shown in our latest Business Confidence Monitor, business confidence improved only marginally in Q4 following the Brexit-induced slump in Q3, and last month’s Autumn Statement seems to have done little to reassure businesses. Although the Chancellor introduced a number or minor measures intended to make life easier for households and firms, they are hardly game-changers in the context of the potential blow to growth and confidence from a difficult Brexit.

It is worth highlighting, however, that businesses remain in a healthy financial position, and in principle have the financial resources to invest given greater certainty about post-Brexit trading trading arrangements.

Labour market set to stall

The jobs market held up reasonably well post-Brexit, and we expect the final number for private sector employment growth in 2016 to be 1.6%. It is expected to slow to just 0.2% in 2017 though, and the unemployment rate will remain broadly stable as the supply of labour expands.

Wage growth is likely to slow beneath inflation for the first time since 2013. Our forecast for wage growth is 2% in 2017, down from 2.2% in 2016, which is substantially weaker than most forecasters’ expectations for price growth. However, the rise in the National Living Wage in April will help some workers, and the increase in the personal allowance will offer a modest boost.

Consumers have already been spooked by price rises in Marmite and teabags but 2017 will see more price increases coming through and households being squeezed.