2017 is set to be an annus horibilis for the UK economy

City and falling FTSE 100 share prices

Predicting the future prospects for an economy is never an easy task. There are always some surprises and unexpected events that can prove even the most logical of forecasts to be wholly inaccurate. Few investors saw the extent of the difficulties during the credit crunch, while the dotcom bubble may be obvious in hindsight, it was anything but at the time. Similarly, the recession in 2002 was caused by an unimaginable event on 9/11 the previous year.

However, looking ahead to 2017, the UK economic outlook is definitely downbeat. Since the EU referendum, the Bank of England has revised its forecasts for the UK economy and it now expects GDP growth to be marginal in 2017. It also anticipates that the level of unemployment will increase to around 5.6% from its current level of roughly 5%. And with the pound weakening by 17% versus the dollar since the referendum, inflation is likely to move higher than its current level of 1%. This could put additional stress on already squeezed disposable incomes.

Nothing to fear but fear itself?

Perhaps the biggest threat to the UK economy in 2017 though, is people's perceptions about the future. Many people have a downbeat outlook on their financial situation for 2017. This could cause a consumer confidence crisis that leads to people cutting back on discretionary items. This has the potential to cause a snowball effect, which could easily push the UK into a recession.

A recession in 2017 may last for quite some time. After all, the Bank of England has less scope to affect the course of the UK economy through a loose monetary policy than it did during the credit crunch. UK interest rates already stand at just 0.25% and so cutting them would be unlikely to have the same impact as a drop of 5%, as was the case during the credit crunch. Certainly, more quantitative easing could be on the cards, but when combined with a weaker pound this could cause inflation to reach undesirable levels.

In addition, the UK will invoke article 50 of the Lisbon Treaty in 2017. This will start a two-year period of discussions between the UK and EU that will see issues such as immigration and access to the single market ironed out. That's the theory at least, but there's a chance that negotiations won't go as planned. Particularly in the early stages of talks, it may seem as though an agreement is a long way off. This could cause confidence in the UK and European economies to flounder, meaning even worse economic performance.

Is there an upside to all this? Of course. The outlook for 2017 may be downbeat, but it's during such periods that the best opportunities come around for long-term investors. High quality companies could trade at major discounts to their intrinsic values, meaning that investors are able to access a wide margin of safety. For investors who prepared to be greedy when others are fearful, paper losses are to be expected in the short run, but in the long run the capital gains could be superb.

Are you prepared for Brexit?

Following the EU referendum, fear and indecision could hurt share prices in the coming months. That's why the analysts at The Motley Fool have written a free and without obligation guide called Brexit: Your 5-Step Investor's Survival Guide.

It's a simple and straightforward guide that could make a real difference to your portfolio returns. In fact, Brexit could even prove to be a positive catalyst on your portfolio performance.

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The world's most successful investors
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The world's most successful investors

Soros is one of the world’s most famous speculators - who sees the market as something to place highly leveraged bets on rather than invest in.

He cemented his reputation by shorting the pound on Black Wednesday in 1992, and making $1 billion from the collapse of the British currency and the near-collapse of the Bank of England.

He is another noted philanthropist, giving primarily to human rights, public health and education charities.

Slater was another highly controversial investor, known for corporate raids on public companies, and subsequent asset stripping to realise quick value for shareholders.

He also invented the phrase ‘The Zulu Principle’ to describe the importance of being a specialist when you are investing, so you can concentrate your research efforts and know more than the rest of the market about something specific.

Woodford (CBE) gained his reputation at the helm of the Invesco Perpetual Income and High Income funds, by offering relative stability and reliability in even the toughest markets.

His trademark was to make bold decisions about the companies he wanted to be invested in, and then stick with them - no matter how unfashionable his decisions were.

It led him to buy tobacco stocks in the 1990s (because he felt that concerns about the legal threats to the firms were overplayed) and avoid technology in the dotcom bubble.

Woodford currently runs Woodford Investment Management.


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