In the UK we expect the economy to have grown by 2.2% in 2016 following growth of 2.3% in 2015. Our central forecast is for growth to slow to 1.8% in 2017, with an upside potential of 2.2%. In the US the recovery continues with growth of 2.2% expected in the year ahead following growth of 1.6% in 2016.
We expect inflation to rise early in 2017 prompted by the rise in oil prices and the depreciation of Sterling. The Bank of England expect inflation to peak at around 3% by the first quarter of 2018. NIESR expect inflation to rises to just under 4% be the end of 2017. We expect inflation to rise significantly in the first quarter, ending the year at 2.5%
The service sector continues to underpin growth in the economy. Following growth of 2.5% in 2015, we expect service sector growth of 2.2% in 2016 and 2.1% in 2017. Construction output, driven by developments in housing and infrastructure, increased by 3.4% in 2015. We now expect growth of 0.2% value based in 2016 and 0.3% in 2017.
Manufacturing output remains almost 6% below the peaks registered in 2008 prior to recession. Following an increase in manufacturing output of 2.9% in 2014, output fell by -0.1% in 2015. We expect an increase of 0.3% in 2016 and 0.1% in 2017.
Within the service sector, the leisure sector is expected to show strong growth along with a strong performance in business services, transport and finance. Overall, the UK will experience modest growth in output over the next two years. [We estimate the long term trend rate of growth to be 2.4% following latest data revisions. We do not share concerns about UK productivity.]
Our GDP Expenditure model is consistent and balanced with the ONS data. We forecast GDP(E) growth of 2.2% in 2016 and 1.8% in 2017. We continue to offer little hope for the re balancing agenda in our forecasts for growth in expenditure. Household expenditure increased by 2.5% in 2016. We expect growth of 2.7% in 2016 slowing to 2.6% in 2017. Government expenditure increased by 1.3% in 2015. Government expenditure is expected to have increased by 0.9% in 2016 increasing to 1.2% in 2017.
Investment increased by 3.4% in 2015. We expect growth of 0.7% in 2016 and 1.3% in 2017 following disappointing Q3 returns. Domestic expenditure increased by 3.4% in 2014 and by 1.9% in 2015. We expect growth of 1.9% in 2016 rising to 2.1% in 2017.
Net trade will continue to have a negative impact on growth, with exports increasing at a slightly slower rate than imports. We are forecasting a deficit (trade in goods) of £132 billion in 2016, rising to £136 billion in 2017. The deficit trade in goods will be offset by a surplus trade in services of over £90 billion.
The challenge to the current account following the drop in overseas investment income continues, presenting a significant problem to the outlook for sterling over the medium term. We expect the current account deficit to average 5% of GDP in 2017, a level incompatible with base rates at 0.25%.
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