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gb2017ch2.pdf

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This is a chapter in the IFS Green Budget 2017. The material was written by researchers at Oxford Economics.

The economy has been more resilient than most commentators expected since the EU referendum, but a period of slower growth is in prospect.

 

The UK economy grew by 2% in 2016, with activity having been unaffected by the EU referendum result. However, with a weaker pound set to drive up inflation and squeeze household purchasing power, we expect GDP growth to slow to 1.6% in 2017 and 1.3% in 2018.

   

Prospect of continued weak productivity performance and less support from rising labour supply means we are relatively gloomy about medium-term growth prospects.

 

Our forecasts show potential output growth of just 1.5% a year from 2017 to 2021. This would be a little lower than 2007–16 (1.6%) and well below the 1996–2006 period (2.7%). A large output gap will allow slightly firmer GDP growth between 2017 and 2021 (1.8% a year).

   

The degree of uncertainty surrounding economic forecasts is virtually without precedent.

 

Brexit represents a source of huge uncertainty, although the risks to the 2017–21 period could be mitigated by a transitional arrangement and the main impact on economic growth is likely to come over a longer time frame.