Severe weather 'bounce-back' is predicted for UK economy

A halving of UK economic growth in the first quarter of 2018 will prove a temporary blip as pressure on household finances eases, according to a closely-watched forecast.

The EY ITEM Club said it expected effects from the so-called 'Beast from the East' to hit the first official reading of growth for the first three months of the year - due this coming Friday.

The independent economic forecast body said it was expecting gross domestic product (GDP) to rise by between 0.2% and 0.3% - largely a result of disruption caused by the cold weather in February and March.

That is down on the 0.4% achieved in the final quarter of 2017 and a tough Christmas for retailers.

:: Retail sales slide as cold weather takes toll

However, its spring forecast predicts a "bounce back" in the current quarter and points to consumers feeling better about their finances as wages grow at a faster rate than prices again after a year in the doldrums.

The findings are backed by a separate Deloitte study, which points to consumer confidence returning to its highest level since the end of 2016 - though still below post-Brexit vote levels.

Howard Archer, chief economic adviser to the EY ITEM Club, said: "The UK economy is chugging along at a fairly steady but uninspiring rate.

"On the surface, the outlook appears stable. Inflation, which impacted consumer spending last year, continues to drop and we expect a tight jobs market to deliver some uptick in pay growth.

"Significantly, a transitional Brexit agreement between the UK and EU has been agreed which should also bring some certainty to businesses and support investment, although it still needs to be ratified.

"However, these factors may be offset by rising interest rates, a recovery in sterling's value and still appreciable Brexit uncertainties bringing new headwinds over the year."

The EY report forecasts two interest rate hikes in 2018, despite economic growth remaining sluggish and inflation falling back.

:: Why interest rate decision just got interesting

Governor of the Bank of England, Mark Carney, has signalled that a rise as soon as next month is not guaranteed, though at least one hawk on the nine-strong rate-setting committee, Michael Saunders, has hinted his support for a 0.25% rise to 0.75%.

Caution is being reflected on financial markets through a weakening of the pound. It is currently trading at two-week lows versus the dollar as expectations of a May rate rise dwindle.

EY argued that the effects of any increase would be minimal as most mortgage-holders are on fixed rate deals in anticipation of rising borrowing costs and admitted rises this year were not an "open and shut case".

It has based its predictions on the expectation that GDP growth will accelerate to 0.5% in the second quarter - with the economy growing by 1.6% during the year as a whole.