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Economic growth will continue to weaken in 2018 and 2019. Private consumption is projected to remain subdued as higher inflation, pushed up by the past depreciation of sterling, holds back household purchasing power. The unemployment rate is at a record low, but with slower growth this is unlikely to persist. Exchange rate depreciation should support exports, while import growth is projected to fall owing to weaker private consumption. An agreement about a transition period linked to the EU exit after March 2019 is assumed and should support growth in 2018 and in 2019, reducing the extent to which uncertainty weighs on domestic spending. Prospects of maintaining the closest possible economic relationship between the United Kingdom and the European Union would further support economic growth.
Monetary and fiscal policies need to remain accommodative. Inflation has risen to 3%, but in the absence of wage pressures the central bank should look through the temporary inflationary impact of currency depreciation. Fiscal consolidation of less than 1% of GDP is planned for 2018 and 2019, but the authorities should stand ready to further increase productivity-enhancing measures to support investment if growth weakens significantly ahead of Brexit.
High consumer debt growth, coupled with stagnant household incomes, is a major financial stability risk. Household debt has been rising gradually, reaching 140% of household disposable income. Banks' exposure to consumer loans is rising and write-off rates on such loans have been ten times higher than on mortgages over the past decade and defaults are much more sensitive to economic conditions. Introducing measures to ensure that household balance sheets remain sound, such as...
