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

The Motley Fool
City and falling FTSE 100 share prices
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.

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