01/01/2017 11:37 GMT

UK Economy Brexit Fears Unfounded In 2016 But 2017 Could Be A Whole Different Story

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The UK economy defied expectations in 2016 as Britons decided to keep calm and carry on spending following the Brexit vote, but there are fears it could be in for a bumpy ride over the year ahead.

Growth showed surprising resilience in the face of recession fears, with warnings from the Bank of England ahead of the EU referendum proving unfounded.

The pound’s plunge in value since the June decision may see growth falter in 2017 - as policymakers warn over an inflation shock that could spark a cost of living crisis for many.

Experts are concerned surging prices from weak sterling will bring an end to the consumer spending spree that has helped prop-up growth since the referendum.

The Office for Budget Responsibility (OBR) has also revealed the economy is set to take a hit of almost £60 billion over the coming five years as a result of the Brexit vote, while slashing growth forecasts and predicting higher than previously expected borrowing.

Chancellor Philip Hammond has already ditched predecessor George Osborne’s plan to achieve a budget surplus by the end of the decade and is hoping to invest in infrastructure to see Britain through the worst of the Brexit fall out.

The Bank launched its action to shore up the economy after the EU vote in August, when it halved the base rate to 0.25% and unveiled a package of measures worth more than £170 billion.

This came as a marked departure from the Bank’s forward guidance at the end of last year, which had suggested rates would be risen early on in 2016 - prompting many homeowners to fix their mortgage rates.

In fact, a very cautious Bank had at one stage guided that more rate cuts were on the cards, though it has since rowed back on this as growth has proved better than expected.

Robust preliminary estimates of growth in the third quarter was revised up to 0.6% in a pre-Christmas dose of cheer, showing output holding firm on the 0.6% notched up in the previous three months and confounding expectations of a sharp slowdown.

The Bank scrapped plans for more rate reductions at its November meeting and raised growth forecasts for this year and next as the economy shrugged off a Brexit hit.

But this cheery outlook was overshadowed as it sent out a warning shot to households over soaring inflation.

Inflation surged to a two-year high of 1.2% in November in a sign that the pound’s sharp fall since the referendum is beginning to impact prices.

The Bank has predicted inflation will jump as high as 2.7% in 2017, while influential think-tank the National Institute of Social and Economic Research has said it could hit almost 4% next year.

Policymakers said their December rates meeting that activity had been “remarkably steady”, but growth is set ease further to 0.4% in the final quarter and the Bank has said cracks are beginning to show in business surveys, confirming expectations of a slowdown in 2017.

In its last rates meeting of the year, the Bank’s Monetary Policy Committee (MPC) said uncertainty was hitting the business sector and causing them to put spending decisions on hold.

This combined with a potential pull-back in consumer spending, will hit the economy and see rates remain at rock bottom for some time yet, according to economists.

It puts the UK on a very opposite path to the United States, which hiked its benchmark interest rate in December and signalled three more increases in store next year as its economy strengthens.

The OBR and the Bank expects growth to pull back sharply in 2017, to 1.4% in 2017 before rising to 1.7% in 2018, according to the OBR.

John Hawsworth, chief economist at PricewaterhouseCoopers, said while recession is likely to remain off the cards in 2017, the outlook is mixed across the difference sectors of the economy.

He said: “We are not predicting a recession and parts of the UK economy should remain relatively strong, particularly in the consumer services, tourism and technology sectors.

“But manufacturing and construction may continue to struggle and the City could suffer some loss of business to other EU countries due to the anticipated impact of Brexit.”

Borrowing levels will also remain eye-wateringly high in 2017, with the OBR forecasting that the Chancellor will overshoot his target this year by nearly £13 billion to £68.2 billion, while forecasts were raised for the next five years.

Economists believe rates will be held at 0.25% throughout the whole of 2017, although with the uncertainties over the Brexit negotiations and surging inflation on the horizon, the outlook is unclear.

As Howard Archer, chief economist at IHS Global Insight, said: “Given major uncertainties over the UK economic outlook as Brexit gets underway and develops, nothing can be ruled out.”