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The Library paper Spring Budget 2017: Background briefing’s contains a section looking at recent developments in – and future prospects of – the UK economy. This is a slightly amended version of the summary of that section.

Growth in the UK economy during the second half of 2016 continued unaffected by the EU referendum result. GDP increased by 0.6% in Q3 2016 compared with the previous quarter and by 0.7% in Q4 2016, supported by robust consumer spending. In 2016 as a whole, GDP growth was 1.8%.

Growth in 2016 was dependent on consumer spending, which increased by 3.1% for the year as a whole, its strongest annual expansion since 2004. Meanwhile, other parts of the economy fared less well. Total investment grew by only 0.5% in 2016, with business investment falling by 1.5%. Exports rose by 1.4%, while imports increased by 2.5%, resulting in net trade subtracting 0.5 percentage points from 2016 growth.

Consumers’ appetite to spend, the bedrock of recent economic growth, will be tested by the increase in inflation currently underway and which is anticipated to continue. This is mostly the result of the fall in the pound since the EU referendum (down 12% as of 1 March), causing import prices to rise. Consumer prices were up 1.8% in the year to January, mostly due to higher petrol prices and the period of falling food prices coming to an end. Consumer price inflation is forecast to reach approximately 3% later this year and early next year.

Rising inflation will eat into consumers’ purchasing power. This is the main reason GDP growth is forecast to slow to 1.4% in both 2017 and 2018 (based on the average of economists’ latest forecasts).

Without unexpectedly higher income growth, an acceleration in household borrowing and/or reductions in savings rates, overall economic growth will need to come from elsewhere to prevent a sharper slowdown. It is unlikely to come from investment, which is forecast to remain weak, and government spending is not likely to provide any meaningful boost to GDP. Instead, the hope – and expectation – is that the fall in the pound will boost the performance of UK exporters, thereby contributing to growth in 2017 and 2018.

For a more detailed look at the UK’s economic situation, please see the Library briefing paper Spring Budget 2017: Background briefing from which the above is taken.

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