UK economy likely to slow progressively throughout 2017

The UK economy has started 2017 with decent momentum in activity and continues to expand at a trend pace.  The recent PMI surveys are in expansion territory and the quarterly pace of GDP growth is in line with trend.

The main influence on UK's macro outlook over the coming year is likely to be the sharp fall in the exchange rate. The weak GBP exchange rate represents a sharp loosening in financial conditions. That said, depreciation of GBP supports domestic tourism and the export economy thus counterbalancing a possible fall in investments.

Prime Minister Theresa May in a speech on Tuesday repeated a couple of times that certainty (to plan) was an important component of the negotiations, Great Britain would remain a reliable partner, ally and friend, that she wanted a “smooth and orderly” Brexit and that a “disruptive cliff edge” had to be avoided.

Her comments boosted the GBP, but markets sceptical about yesterday’s Sterling rally. The long term risks of a Brexit have not fallen. The continued uncertainty about how the relationship between the UK and the EU-27 will work in future is the main factor putting pressure on GBP exchange rates.

"Our forecast for 1.6% y/y GDP growth during 2017 is in line with US GDP growth during 2016 and not far below our forecast of 1.8% growth in 2017 for Germany (the powerhouse of the eurozone). So this is far from a disaster and probably temporary. That said, we forecast that quarterly GDP growth will fall to as low as 0.2% q/q during H2, which is a pretty feeble pace." said Scotiabank in a report.