Warning of ‘significant slowing’ of UK economy

Chancellor Philip Hammond is likely to face a downbeat outlook for the UK economy at his March Budget after its leading forecaster pointed to a “significant slowing”.

Sir Charlie Bean of the Office for Budget Responsibility and former deputy governor of the Bank of England said on Tuesday that the strong consumer spending seen after the Brexit vote last year was likely to fall away in coming months.

With the OBR unlikely to forecast a tax windfall for Mr Hammond, the chancellor would find it difficult in his March 8 speech to ease severe pressure on social care and the National Health Service.

Speaking at a monetary policy forum organised by Fathom Consulting in London, Sir Charlie said the longer-term effects of Brexit remained impossible to predict because there were “so many moving parts”, but economists were on firmer ground over the short-term effects.

Despite endorsing the Treasury’s warnings of a recession following a vote to leave the EU, Sir Charlie said there were four explanations for consumer spending exceeding forecasts in the second half of last year.

Household income growth had remained strong with inflation far below the increase in wages; half the population were cheered by the referendum result and so were not cowed by the result; the BoE had eased monetary policy; and households had spent more knowing a weak pound was likely to drive prices higher.

The first reason was by far the most plausible, he said, “but all of them should make you relatively pessimistic about what happens this year”.

With inflation rising and about to squeeze household incomes, “this all points to a significant slowing in consumer spending over the next year or two”.

Sir Charlie’s comments came as BoE figures showed consumer borrowing growth in December slowed to its lowest level in over two years, while consumer confidence has also dipped. The borrowing figures, he said, “might be the canary in the coal mine”.

Sir Charlie has recently taken over from Sir Steve Nickell as the person responsible for the OBR’s macroeconomic forecasting. He said other sources of growth to offset consumer spending were unlikely to be strong.

It was right to expect a slowdown of business investment and growth would take some time to materialise after the referendum, he said. He also cast doubt on the view that trade would take up the slack from consumer spending, pointing to the weakness of exports and relative strength of imports after the 2007-09 depreciation of sterling.

Mr Hammond has been cautious in his assessment of the UK’s prospects.

After praising the resilience of the economy after strong growth figures last week, the chancellor said: “There may be uncertainty ahead as we adjust to a new relationship with Europe, but we are ready to seize the opportunities to create a competitive economy that works for all.”