U.K. ETFs In Focus On Lower GDP Growth Forecasts

The European Commission revised its forecast for U.K. GDP growth to 1.5% for 2017 from 1.8% predicted earlier. Moreover, the commission expects GDP growth to fall to 1.3% in 2018 and 1.1% in 2019, as mounting concerns related to a hard Brexit weigh on the economic prospects of the region.

Economic Scenario

In the third quarter, U.K.’s GDP grew 0.4% sequentially and 1.5% year over year. Although this reflects a slight increase from 0.3% sequential growth in the second quarter, the rate of improvement has been dismal since Brexit and lags the overall Euro zone. The Commission increased its forecast for Euro zone growth to 2.2% in 2017 from its previous estimate of 1.7%.

The U.K. consumer price index increased 3% year over year in September compared with 2.9% in August, per data released by the Office for National Statistics.

Earlier this month, the Bank of England (BOE) hiked its benchmark interest rate by 25 basis points to 0.5%. Despite relatively weak growth, this is the first time that the central bank has hiked the interest rate for since July 2007 in order to curb inflation.

The British economy has been suffering since the Brexit referendum as a falling sterling has made imports costlier and compounded consumer woes. Moreover, wages in the United Kingdom are not increasing as fast as inflation. It grew 2.4% in October, as a result of which consumers are witnessing a rise in costs in real terms. This, in turn, is weighing on consumer spending in the U.K, one of the factors cited by the commission behind the weaker GDP growth expectations.

Central Bank Estimates Differ

The Commission also expects weak investment growth in the future, as companies seek other investment options in order to avoid uncertainty. Moreover, the contribution of exports to GDP growth has been weak despite the fall in sterling.

The projections of the Commission are similar to that of the Organization for Economic Cooperation and Development (OECD). OECD expects U.K. GDP to grow 1.6% this year and 1% in 2018. The Bank of England expects GDP to grow 1.6% in 2017 and 2018 before increasing to 1.9% in 2019.

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