UK economy to recover next year after GDP growth 'trough', says think tank

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The UK economy will start to recover in 2018 but will first hit a "trough" for growth this year, an influential think tank has said.

The National Institute of Economic and Social Research (NIESR) has maintained growth estimates for gross domestic product (GDP) for 2017 at 1.7% after second quarter growth clocked in at 0.3%.

It has also held  forecasts for next year steady at 1.9%.

"The economy has slowed each year since 2014 and, according to our forecast, 2017 will mark the trough for GDP growth," NIESR said.

"Thereafter, we envisage a modest recovery that takes economic growth to a level that is close to potential."

However, NIESR cautioned that its forecasts were based "on a return to meaningful productivity growth from 2018 onwards", and warned that "failure of such growth to materialise" would present a downside risk to its forecasts.

The think tank has revised down its inflation forecasts after the consumer price index (CPI) measure came in weaker than expected in the second quarter, having fallen from a near four-year high of 2.9% in May to 2.6% in June.

It had previously forecast that inflation would peak at 3.4% by the end of this year, but has revised the figure down to 3%.

NIESR also expects CPI to return to the Bank of England's 2% target by the end of 2019.

Despite the downward revision to inflation, the think tank believes the Bank will take action on interest rates much quicker than previously thought.

The report suggests the Bank of England's Monetary Policy Committee (MPC) could raise rates in the first quarter of 2018 rather than the second quarter of 2019 - marking the first rate rise in nearly 11 years.

"This rate increase should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy after the 2016 EU referendum," NIESR said. 

As part of the Bank's post-Brexit vote stimulus programme, the MPC not only cut rates to record lows of 0.25%, but ramped up its quantitative easing programme by £60 billion to £435 billion, and bought £10 billion of corporate debt meant to lower the cost of borrowing for companies.

There have been signs of growing division among interest rate setters at the Bank of England, with MPC members Ian McCafferty, Kristin Forbes and Michael Saunders voting for a rise in June and chief economist Andy Haldane suggesting he may support a "prudent" increase this year.

However, Ms Forbes ended her tenure earlier this summer, leaving one less hawk on the Bank's rate-setting committee, which is expected to keep interest rates on hold later this week.