EY ITEM Club Autumn Forecast Is the economy ready to step up a gear?

Transcription

1 EY ITEM Club Autumn Forecast Is the economy ready to step up a gear? October 2017

2

3 Contents EY is the sole sponsor of the ITEM Club, which is the only non-governmental economic forecasting group to use the HM Treasury model of the UK economy. Its forecasts are independent of any political, economic or business bias. Foreword 2 Highlights 4 Introduction 5 Forecast in detail Fiscal policy Monetary policy Prices Activity Consumer demand Housing market Company sector Labour market and wages Trade and the balance of payments 20 EY 1

4 Foreword Mark Gregory EY Chief Economist Foreword Stuck in low gear A new start The core theme of the Summer EY ITEM Club forecast was change, as we bid farewell to Professor Spencer - who retired as our Chief Economic Advisor - and awaited signs of future policy direction after the general election. It is great to have Howard Archer in place to oversee his first forecast and to help us understand what has changed in the last three months. but little change either overall In many respects things are as they were. While a formal Brexit is still 18 months away, according to the official timetable, the consequences of the EU referendum result are influencing UK economic performance. In particular, the lower value of sterling and the decline in business confidence, both of which can, at least in part, be attributed to the referendum result and continue to impact the economy. Consumer spending is slowing as real incomes come under pressure from inflation and consumers worry about the future, while uncertainty appears to be affecting business investment with no real signs of significant growth in capital investment. With exports only adding a small amount of momentum and with little change in the Government s fiscal stance, the overall effect is for growth to remain below trend and in line with the situation at the time of the summer forecast. The UK economy appears to be growing at around 0.3 to 0.4% a quarter according to the EY ITEM Club. or with Brexit As EY ITEM Club note, the details of the basis for Brexit remain unclear, although the UK Government has made plain its desire for a transition arrangement, during which the UK s relationship with the EU would continue much as it does at present. The latest forecast assumes a transition arrangement will happen and that the details of this will be clear by October 2018, creating more certainty and encouraging an increase in business investment in the later years of the forecast. though a sharper tone from the Bank The major change in the last few months has been the hardening of the attitude of the Bank of England towards an interest rate rise. In part, the Bank appears concerned over the amount of spare capacity in the UK economy, and hence the risk of inflation even after the impact of last year s decline in sterling has worked through. Nevertheless, the EY ITEM Club expect a relatively slow pace of EY 2

5 Foreword tightening after an initial interest rate increase of 0.25% in November. As such there is little impact on the overall forecast. but little change overall The message for businesses remains similar to that after the summer forecast the UK economy is stuck in a low gear with low growth compared to historic averages. The consumer sector remains under the most pressure with inflation, low wage rises, welfare cuts and a slow housing market all acting as drags on spending. Consumer and retail businesses are dealing with the challenges of major disruption from online in their sectors, and it may be time for businesses exposed to consumer spending to undertake an in-depth review of the fit of their business models to the emerging environment. The other key issues that all businesses should be assessing are: Changes to the UK labour market as Brexit comes ever closer. Although there has been anecdotal evidence of labour shortages in some sectors, the wage and employment data have yet to reflect this. Nevertheless constant monitoring is essential to avoid being caught out. Interest rate increases. It does appear that there is going to be a rise in interest rates, so businesses need to be sure their financing is in place and that they are able to cope with the new rate-rise scenario. Political uncertainty. The landscape has changed and the Conservative Party conference featured a number of announcements signalling a more interventionist role in energy prices and housing. If there is a continued slowdown it is likely that more areas may come under scrutiny. As such, businesses should continue to monitor how their operations might come into the spotlight and what the risks of this could be. The economy has not fallen off a cliff as some forecasts around the impact of Brexit predicted, but growth is slow and the risks are weighted towards the downside, with Brexit and the labour market providing the most significant areas of uncertainty. Confidence is fragile and bad news or adverse developments could create a momentum of their own. It would be sensible for businesses to consider the impact of a downside case in their planning to reflect a potential sharp slowdown after Brexit while the economy comes to term with the changes. EY 3

6 Highlights Highlights Following markedly slower growth in the first half of 2017, the economy seemingly remained stuck in low gear over the summer as consumers purchasing power continued to be squeezed markedly and uncertainties over the outlook were fuelled by slow progress in Brexit negotiations between the UK and the EU. We suspect GDP growth was % quarter-on-quarter (q/q) in Q3 after expansion of 0.3% q/q in both Q1 and Q2. The economy looks likely to continue to struggle for momentum during Q and early on in Consumer price inflation reached 2.9% in August and seems set to climb just above 3% during the final months of 2017, which will keep the squeeze on consumers. Furthermore, average earnings growth was limited to 2.1% in the three months to July, despite the unemployment rate falling to 4.3%, the lowest rate since Employment has continued to rise markedly despite lacklustre UK growth but there are currently few if any signs of a tightening labour market generating higher pay. Meanwhile, businesses are likely to be cautious over investment in the near term as Brexit negotiations between the UK and EU are likely to progress relatively slowly despite Prime Minister Theresa May s Florence speech. Consequently, we expect GDP growth to be limited to 1.5% in Growth is seen at 1.4% in 2018, but this masks an expected gradual pick-up in activity as next year progresses. Consumer price inflation looks likely to fall back markedly during 2018 and to end the year back down around 2% as the impact of sterling s sharp drop in the second half of 2016 increasingly fades. This should progressively support consumer purchasing power, while earnings growth is expected to pick up gradually (helped by a relaxation of the Government s public sector pay cap). Much will clearly depend on how Brexit negotiations develop. Our central assumption is the UK and EU will make sufficient progress in their negotiations to agree a transition arrangement that is likely to last at least two years, from late March Given that a transition arrangement will have to be ratified across the EU, it essentially means agreement will need to be reached by October Progress towards a transition agreement in the latter months of 2018 is seen as boosting business confidence and supporting a gradual pick-up in investment. This should help GDP growth improve to 1.8% in 2019 and 2.0% in The Bank of England s Monetary Policy Committee (MPC) has recently become markedly more hawkish over UK inflation and diminishing slack in the economy. While the Bank has previously talked up the prospect of a near-term interest-rate hike, talk which ultimately wasn t realised, there seems to be more unanimity within the MPC this time around for a tightening of policy. Furthermore, if the MPC decides to hold interest rates despite these hawkish comments, there is a risk that it could undermine the Bank of England s credibility barring markedly weaker UK economic data over the coming weeks. Consequently, we now lean towards the view that the Bank of England is more likely than not to hike interest rates from 0.25% to 0.50% before the end of 2017, with a move most likely in November. Given that interest rates have not risen since 2007, the MPC may well sit tight for an extended period after an initial hike to see how consumers and businesses respond. Specifically, we do not see the MPC acting again until Q when we believe that an improving economy helped by progress towards a Brexit transition deal and reduced squeeze on consumers will see interest rates lifted to 0.75%. June s general election result suggests that some of the public are fed up with austerity and with the public sector pay cap. This is likely to lead to a modest easing in the fiscal stance in November s Budget, including a relaxation of the 1% cap on public sector pay growth. However, Chancellor Philip Hammond has repeatedly stated that he remains committed to the fiscal rules established in the 2016 Autumn Statement which aim for a balanced budget by the mid-2020s. The Chancellor may also want to keep some ammunition up his sleeve in case, at some stage, the economy is impacted by Brexit uncertainties. EY 4

7 Introduction Introduction The autumn forecast sees GDP growth of 1.5% this year, unchanged from the July projection. Expected growth of 1.4% for 2018 has been revised up slightly from 1.3%. The medium-term projections are unchanged, having been lifted in July when we concluded that the weakened position of the Conservatives following June s general election is likely to result in a more business-friendly Brexit, as well as in a modestly looser fiscal stance. Specifically, we continue to see GDP growth of 1.8% in 2019, 2.0% in 2020 and 2.2% in The economy appears to have continued a lacklustre performance over the summer after a weakened first-half performance, and is still clearly finding life challenging as a substantial squeeze on consumer purchasing power persists. Economic, political and Brexit uncertainties also remain elevated, particularly following June s General Election result. With divisions between hard-line Brexiteers and those members that favour a softer, business-friendly exit, the Prime Minister has had a difficult task trying to come to an acceptable consensus view within the Cabinet on the way forward, including the length and form of a transition agreement. Further hampering progress on the Brexit front has been the EU negotiators insistence that the UK must settle (or at least make meaningful progress on) the issues surrounding its divorce from the EU, before any negotiations can take place on transitional arrangements and the future UK EU relationship. In particular, the EU wants agreement on: (1) the UK s financial settlement for leaving the EU (EU sources have claimed this could be up to 100 billion while the Prime Minister s Florence speech implied an offer of around 20 billion), (2) protecting the rights of EU and UK citizens, and (3) sorting out the new UK EU land border with Ireland. The summer has also seen the Bank of England s MPC become increasingly hawkish on the case for raising interest rates from 0.25% to 0.50% and a move now seems highly possible before the end of the year. Meanwhile, on the fiscal policy front, the Government has brought an end to the 1% public sector pay cap, although Chancellor Philip Hammond has indicated that there will not be major changes to the fiscal stance despite the public s clear dissatisfaction with austerity expressed in June s general election, and that he remains committed to the fiscal rules set out in the 2016 Autumn Statement which commit to a balanced budget by the mid-2020s. The economy seemingly remained stuck in slow gear over the summer Since our July forecast was completed, there has seemingly been little material change in the economy s growth performance in the face of ongoing challenging domestic conditions and major uncertainties. GDP growth of 0.3% quarter-on-quarter (q/q) in Q2 after an upwardly revised expansion of 0.3% q/q in Q1 was exactly in line with what we had expected. It also represented the economy s weakest six months performance since the first half of GDP growth looks likely to have been little changed at % q/q in Q3. Manufacturing output seemingly picked up over the summer (thereby moving more in line with recent largely healthy surveys). However, latest data shows services output disappointingly dipped 0.2% month-on-month (m/m) in July after a 0.3% gain in June. Additionally, the construction sector appears to have had a difficult third quarter and was likely a drag on the economy. Overall, the Purchasing Managers Indices for the services, manufacturing and construction sectors indicated similar expansion in Q3 as in Q2. EY 5

8 Introduction On the expenditure side of the economy, it appears that retail sales were healthy during Q3, helped by more people staying in the UK during the summer holidays and from tourists being encouraged to spend by the weakened pound. Nevertheless, consumers continue to be constrained by substantially squeezed purchasing power coming from inflation running well above earnings growth. Meanwhile, surveys largely suggest that businesses were cautious over investment in Q3 following the economy s weakened firsthalf performance and a widely expressed desire for greater clarity over the UK s likely relationship with the EU once Brexit occurs in late March The labour market continues to tighten but earnings growth remains muted Despite ongoing lacklustre UK economic growth, the labour market has continued to tighten. Indeed, the number of employed rose by 181,000 in the three months to July to reach a record million. The number of jobless fell by 75,000 to million, which took the Labour Force Survey (LFS) unemployment rate down to 4.3%, the lowest level since This is below the 4.5% unemployment rate that the Bank of England currently considers to be the equilibrium level. The ongoing strengthening of the labour market has obviously been good news for UK consumers, especially as earnings growth remains subdued, but it has resulted in a relapse in already weak UK labour productivity over the first half of The ongoing tightening of the labour market is still not showing any clear sign of lifting earnings growth, which remains muted. Indeed, annual headline growth in average weekly earnings was stable at 2.1% in the three months to July. This was up only modestly from a low of 1.9% in the three months to May. Consequently, total real pay decreased by 0.4% in the three months to July. On a monthly basis, headline earnings growth fell back to 1.4% in July itself, after jumping to 2.8% in June from 2.0% in May due to bonus payments in the financial sector. EY 6

9 Introduction The continued tightening of the UK labour market and ongoing muted earnings growth is the source of much focus, not least within the Bank of England s MPC. It does appear that the ongoing cheapness of labour is pricing workers into jobs. It may be that some UK companies are currently keen to take on workers, or at least hold on to them, given concerns over labour shortages in some sectors and reports of fewer EU workers coming to the UK since the June 2016 Brexit vote. Furthermore, with the price of labour relatively cheap to capital, in a highly uncertain economic and political environment it is particularly attractive for companies to try and meet any extra business, if they can, by taking on more workers rather than committing to potentially costly and lengthy investment. Meanwhile, with consumer confidence brittle through 2017 and pressurised by major uncertainties over the future, it does appear that employees are reluctant to push for markedly higher pay increases despite higher inflation. At the same time, some companies clearly remain keen to limit pay as they face a highly challenging domestic economy and as their input costs have been raised markedly by the sharp overall weakening of the pound. The Bank of England s regional agents summary of business conditions for Q3 (released in September,) reported that growth in total labour costs was modest overall, with the majority of pay settlements clustered around 2% to 3%. Low pay keeping squeeze on consumers as inflation nears 3% Persistent muted earnings growth has squeezed UK consumers hard during 2017 in tandem with markedly higher inflation. Indeed, consumer price inflation rose back up to 2.9% in August (after a dip to 2.6% in both June and July), thereby matching May s equal highest level since April Inflation is currently still being driven up by the lingering impact of sterling s sharp drop following the vote for Brexit in June A recent firming in oil prices has also caused petrol prices to move back up after they had dipped for the five months running through to July. Consumer price inflation looks likely to rise just above 3% in the near term, partly due to an upward impact from energy prices as British Gas increased its electricity tariffs by 15% in mid-september. However, there looks to be a very good chance that this will mark the peak in inflation as the upward impact of sterling s sharp decline in the second half of 2016 is now likely close to peaking and should increasingly fade as 2018 progresses. Admittedly, September s firming in oil prices has increased the upside risks to inflation but this has been partly countered by a firming in sterling. Interest-rate hike before the end of 2017 now a very real possibility The MPC has recently become markedly more hawkish in tone, and there now looks to be a very real likelihood that the central bank will raise interest rates from 0.25% to 0.50% before the end of EY 7

10 Introduction This is despite the economy still struggling to generate growth momentum, earnings growth remaining muted and Brexit uncertainties clouding the outlook. With consumer price inflation rising back up to 2.9% in August and seemingly set to rise above 3% over the final months of 2017 and the unemployment rate down to 4.3%, the MPC is becoming increasingly reluctant to tolerate extended above-target inflation amid mounting concerns over the economy s growth potential and diminishing slack in the economy. Specifically, the minutes of the September MPC meeting observed that Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years. Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. While only two (Michael Saunders and Ian McCafferty) of the nine MPC members voted for an interestrate increase from 0.25% to 0.50% in September, other committee members appeared to be moving towards joining them as the minutes of the meeting reported that a majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the tradeoff that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. The Bank of England has previously talked up the prospect of a near-term interest-rate hike which ultimately wasn t realised. Significantly though, there seems to be more unanimity within the MPC this time around for a hike, and so continuing to hold could risk undermining the Bank of England s credibility - barring markedly weaker UK economic data over the coming weeks. Consequently, we now lean towards the view that the Bank of England is more likely than not to raise interest rates from 0.25% to 0.50% before the end of 2017, with a move most likely in November. Given that interest rates have not risen since 2007, the MPC may well sit tight for an extended period after an initial hike to see how consumers and businesses respond. Specifically, we do not see the MPC acting again until Q when we believe that an improving economy helped by progress towards a Brexit transition deal and a reduced squeeze on consumers will see interest rates lifted to 0.75%. Government has ended 1% pay cap but remains committed to deficit reduction June s general election result suggests that the public has become fed up with austerity. This has notably included mounting dissatisfaction with the 1% cap on public sector pay growth as public sector workers have been increasingly squeezed by markedly higher inflation. The Government has responded by announcing an ending of that cap. In September, modest pay increases were announced for the police (a 1% rise and 1% bonus) and prison workers (an increase of 1.7%), and this looks set to be followed with rises for teachers and NHS workers. Even so, while the Government has indicated that it will be more flexible on public sector pay going forward, it continues to stress the need for fiscal discipline given, in its view, the need to eliminate the budget deficit. Chancellor Philip Hammond may also want to keep some room for manoeuvre given the major uncertainties facing the economy over the coming years as Brexit proceeds. With the public finances performing better than expected over the first five months (April August) of fiscal year 2017/18, the Chancellor will likely have a little wiggle room in November s Budget. Even so, apart from modestly higher public pay increases, the strong suspicion remains that Mr. Hammond is EY 8

11 Introduction minded to make limited tweaks to the fiscal approach in November s Budget rather than radical policy changes. The latest indication from the Government is that there will be some help to younger voters (who were particularly minded to support Labour in June s general election) by freezing university tuition fees and raising the income threshold at which student loan repayments start to be made. UK Government wants two-year transition period after Brexit but progress on negotiations with EU currently remains slow and difficult The summer saw limited progress on the Brexit front as the Government sought to establish areas of agreement on the way forward both on the need for, and form of, a transition arrangement between the UK and the EU after Brexit occurs in late March 2019; and more fundamentally on the future relationship between the UK and the EU. Additionally, there was a crucial difference in the negotiations between the UK and the EU the EU insisted that the UK must make sufficient progress on its exit arrangements from the EU before there can be any discussion on future trading arrangements and a transition agreement, while the UK argued that the two should go hand in hand. Meanwhile, some businesses called for clarity from the Government, arguing that the danger of a cliff edge exit for the UK from the EU at the end of March 2019 was already weighing down on the planning of their future operations, particularly with regard to investment. Prime Minister Theresa May aimed to provide more clarity on the UK Government s position on Brexit and move negotiations with the EU forward in a major speech in Florence on 22 September. In the speech, the Prime Minister stated that the UK wanted a transition (or implementation) arrangement after the UK leaves the EU in late March 2019, most likely lasting two years (but possibly longer). During this period, current arrangements would essentially continue. UK and EU access to each other s markets will remain the same, the UK will continue to make payments to the EU budget, there will be continued freedom of movement (albeit with EU visitors to the UK being registered as they arrive), and the rulings of the European Court of Justice will be taken into consideration by UK courts. While the EU has largely seen Mrs May s speech in a positive light, being made in a much more constructive spirit than her Lancaster House speech back in January, its chief negotiator Michel Barnier is calling for more clarity on the terms of the UK exit from the EU before agreeing to discuss a transition agreement. The EU continues to want more progress on exactly how much the UK will pay to settle its divorce bill for leaving the EU (the UK Government has so far indicated a payment of around 20 billion to the EU budget during the two-year transition period) as well as sorting out the Irish border and citizens rights. It is also notable that while the UK Government has now established its position on a transition agreement, it remains far from clear what relationship it favours with the EU over the long term. In her Florence speech, Mrs May rejected both the Norwegian and Canadian arrangements with the EU as inadequate for the UK. While the Norwegian model would allow the UK to remain close to the EU in regulatory terms, it would come at a price regarding freedom of movement and payments to the EU, with the UK being essentially a rule taker and having limited say. Meanwhile, although the Canadian model offers greater freedom in terms of rules, the scope of the agreement is much more limited. The indication is that the UK believes that it can come to a better, bespoke arrangement with the EU which would build on the regulatory harmonisation that the two sides currently enjoy. However, this is likely to prove difficult to agree on as the EU s chief negotiator Michel Barnier has already observed that One thing is sure: it is not and will not be possible for a third country to have the same benefits as the Norwegian model but the limited obligations of the Canadian model. Economy seen as improving gradually during 2018 and beyond, as squeeze on consumers eases and likely Brexit transition period eases uncertainty The forecast sees GDP growth at 1.5% in 2017, unchanged from the July projection. This assumes that growth was % q/q in Q3 and that the economy will continue to see limited growth over Q EY 9

12 Introduction and the early months of The squeeze on consumers will remain appreciable in the near term and could very well deepen in Q as consumer price inflation looks likely to briefly rise above 3%, while earnings growth remains muted. Meanwhile, businesses look set to retain a cautious approach to investment as Brexit negotiations between the UK and EU are likely to progress slowly despite Theresa May s Florence speech. Decent foreign manufacturing orders fuel hopes that exports will make an increased contribution to growth helped by a still very competitive pound and healthy global growth, but this has remained elusive in the hard data. There is evidence to suggest that UK exports have been limited to some extent by companies using the weaker pound to boost their profit margins rather than price competitively in foreign markets. The EY ITEM Club forecast for the UK Economy, Autumn 2017 % changes on previous year except borrowing, current account and interest & exchange rates GDP Domestic demand Consumer spending Fixed investment Exports Imports Net Government borrowing(*) Current account (% of GDP) Average earnings CPI Bank Rate Trade-weighted exchange rate (*) Fiscal years, as % of GDP Source: EY ITEM Club GDP growth is projected to be 1.4% in 2018, a slight upgrade on our July forecast of 1.3% expansion. Although GDP growth is seen as lower in 2018 than in 2017, this masks an expected gradual pick-up in activity as the year progresses. However, much will clearly depend on how Brexit negotiations develop. Our central assumption is that the UK and EU will make sufficient progress in their negotiations to agree a transition arrangement that is likely to last two years from late March 2019 (with the possibility of an extension if needs be). Given that a transition arrangement will have to be ratified across the EU, it essentially means that agreement will need to be reached by October. Progress towards a transition agreement in the latter months of 2018 is seen as boosting business confidence and supporting a gradual pick-up in investment. Meanwhile, the squeeze on consumers should ease appreciably during 2018 as inflation is likely to head back to 2% by the end of the year from 3% at the start, and earnings growth will gradually strengthen (helped by the easing of the public sector pay cap). However, the upside for consumer spending is expected to be limited by markedly slower employment growth. Meanwhile, net trade is expected to EY 10

13 Introduction make a modest positive contribution to growth as the pound remains at a relatively competitive level and global growth is decent. With the UK seen as avoiding a cliff edge exit from the EU in March 2019 due to a transition arrangement coming into force, the economy is likely to benefit from improving business investment over the medium term. Meanwhile, consumer spending should benefit from reasonable purchasing power. However, it will be important that the UK makes tangible progress during in developing its long-term relationship with the EU and also in deepening trading relationships with other countries. GDP growth is seen as improving to 1.8% in 2019, 2.0% in 2020 and 2.1% in 2021, unchanged from our July forecasts. Risks and uncertainties It is clear that the economy s performance in 2019 and beyond will depend critically upon the UK concluding a transition agreement with the EU. Although the next few months should bring greater clarity here, this continues to be the number one uncertainty. There is also the potential for the economy to be impacted by political uncertainty, particularly given the loss of the Conservative government s majority following June s general election. An early general election would undoubtedly have economic repercussions. EY 11

14 Forecast in detail Forecast in detail 1. Fiscal policy June s general election result suggested that some of the public were fed up with austerity. There was particular disquiet over the 1% cap on public sector pay, as markedly higher inflation had made this restraint much harder than had been envisaged. Both Chancellor Philip Hammond and Prime Minister Theresa May have acknowledged the views of the electorate, and an easing of the public sector pay cap has already been announced. In September, the police were awarded a pay increase of 1% plus a 1% bonus, while prison officers were given a rise of 1.7%. Above 1% increases are expected to be announced shortly for teachers and NHS workers. However, while Theresa May has indicated that there will be more flexibility on public sector pay going forward, she has also stressed the continuing need for a tight approach. Indeed, the Government has stressed the need to remain responsible with regards to the public finances given the still-weakened position. While Public Sector Net Borrowing excluding public sector banks (PSNBex) at 45.6 billion in 2016/17 was at the lowest level since 2007/08, it still amounted to 2.3% of GDP. Furthermore, public borrowing was limited in 2016/17 by some special factors, and in the March Budget, the Office for Budget Responsibility (OBR) projected it would rise back up to 58.3 billion (2.9% of GDP) in 2017/18. Further out, the OBR saw PSNBex still at 16.8 billion (0.7% of GDP) in 2021/22. Chancellor Philip Hammond has repeatedly stated that he remains committed to the fiscal rules established in the 2016 Autumn Statement which commit to a balanced budget by the mid-2020s. It is also evident that the Chancellor wants to keep some ammunition up his sleeve in case, at some stage, the economy takes a major hit from Brexit uncertainties. However, there is some wiggle room within this. Indeed, the OBR noted at the time of the March Budget that the Chancellor has a sizeable 26 billion margin for error against his main fiscal rule to get the structural budget deficit below 2% of GDP in 2020/21. Furthermore, PSNBex amounted to 28.2 billion in the first five months of fiscal year 2017/18 (April August), down 0.7% on the 28.4 billion shortfall in April August It was the smallest April August PSNBex since If the pattern of the first five months was repeated over the full fiscal year, 2017/18 public borrowing would come in at 45.3 billion which would be substantially below the OBR s forecast shortfall of 58.3 billion in March s Budget. While a still lacklustre economy and higher debt interest payments look likely to weigh down on the public finances over the coming months, it does look likely that there will be some undershoot of the 2017/18 target which will give the Chancellor some room for manoeuvre in November s Budget. It looks most likely that the Chancellor will slightly relax the fiscal squeeze in the Budget but there will not be a major recalibration of fiscal policy. In addition to modestly higher public pay awards, there may well be some limited slowdown in the public spending cuts. Prime Minister Theresa May has also indicated that there will be some help for the young with university graduate fees frozen at 9,250 a year and the income threshold for paying student loans back raised from 21,000 to 25,000. There will also be an extension of the Help to Buy Scheme that helps people to buy newly built homes as well as an extra 2 billion investment in affordable housing. The Government has indicated since June s election that it remains committed to bringing corporation tax down. This was cut from 20% to 19% in April 2017, and is due to come down to 17% in April EY 12

15 Forecast in detail 2. Monetary policy The Bank of England s MPC has recently become markedly more hawkish and an interest-rate rise from 0.25% to 0.50% now looks to be a very real possibility before the end of 2017, with a move most likely at the early-november meeting when the Bank will also release its latest quarterly Inflation Report. The last MPC meeting in September saw a 7-2 vote for keeping interest rates at 0.25% with the two dissenters voting for an immediate 25 basis points hike to 0.50%. However, while only two MPC members voted for a rate rise in September, the minutes observed that both headline (2.9%) and core (2.7%) inflation had been higher than expected in August while sterling had been volatile and the oil price had increased. Consequently, inflation is now seen as rising above 3.0% in October. On the growth front, the MPC considered that, if anything, economic activity had been slightly stronger than expected since the August meeting and Inflation Report. Unemployment had continued to fall with surveys pointing to further employment growth. Meanwhile the MPC considered there are some indications that underlying pay growth is showing some signs of recovery although it remains modest. Consequently, the September minutes concluded All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations. Furthermore, A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. Admittedly, the Bank of England has previously talked up the likelihood of an interest-rate hike, which ultimately wasn t realised, but there does seem to be a more concerted effort this time and more unanimity within the MPC of the case for a hike. This seemed particularly evident in a hawkish speech in mid-september by MPC member Gertjan Vlieghe in which he concluded that the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise. Vlieghe had previously been seen as perhaps the most dovish MPC member and as recently as July had warned that a premature interest-rate hike would be a bigger mistake for the UK economy than one that turned out to be slightly late. Recent speeches by Bank of England Governor Mark Carney have also seemingly paved the way for an interest-rate hike in the near term. We now lean towards the view that the Bank of England is more likely than not to hike interest rates from 0.25% to 0.50% before the end of 2017, with a move most likely in November. We are far from convinced that this is the right course of action as we believe that it is still likely that inflation will fall back markedly through 2018 as the impact of sterling s past drop fades and domestic price pressures are likely limited by ongoing lacklustre growth and only a gradual pickup in earnings growth. Brexit uncertainties are also likely to remain elevated well into 2018 and perhaps beyond. Admittedly, oil prices rising to a two-year high in late September has increased the upside risks to inflation but this has been partly countered by a firming in sterling. Even if the Bank of England does raise interest rates from 0.25% to 0.50% sooner rather than later, it is highly likely that the MPC will tread very carefully on further increases. Indeed, given that interest rates have not risen since 2007, the MPC may well sit tight for an extended period after an initial hike to see how consumers and businesses respond. It is also notable that the MPC has repeatedly stated that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent. EY 13

16 Forecast in detail Consequently, on the assumption that the Bank of England will lift interest rates from 0.25% to 0.50% before the end of 2017, we do not see the MPC acting again until Q when we believe that an improving economy helped by progress towards a Brexit transition deal and reduced squeeze on consumers will see interest rates lifted to 0.75%. Thereafter, we see the Bank of England lifting interest rates very gradually to 1.25% by the end of 2019, 1.75% by the end of 2020 and 2.25% by the end of Sterling has been firmer against a generally softer dollar recently and was trading close to $1.34 in early October, compared to its early-2017 lows of around $1.20. However, the pound has been softer against a well-supported euro. The pound is likely to be supported in the near term by expectations that the Bank of England will hike interest rates in November, but we suspect it will soften thereafter amid ongoing lacklustre UK growth and likely slow progress on Brexit negotiations with the EU. Consequently, we see sterling trading around $1.32 at the end of 2017, dipping to a low of around $1.26 in the first half of Sterling is seen as gradually firming thereafter as the UK economy firms and the UK progresses towards a transition deal on Brexit. A likely Bank of England interest-rate hike late on in 2018 is also seen as supporting the pound so it is likely to rise to $1.31 at the end of 2018, moving up to $1.35 during Prices Consumer price inflation rose to 2.9% in August from 2.6% in both July and June, thereby matching May s highest level since June Inflation is currently well above the Bank of England s 2.0% target level and it has been above target since February Inflation has been driven substantially higher since August 2016 (when it stood at 0.6%) by sterling s sharp weakening since the June 2016 Brexit vote. Markedly higher oil prices compared to a year earlier and firming food prices also took inflation up to May s peak level, while the Big 6 energy suppliers have lifted electricity and gas tariffs. Inflation dipped from May s high in June and July largely due to an easing back in petrol prices but a renewed rise in oil prices along with higher prices for clothing sent consumer price inflation back up to 2.9% in August. Inflation looks likely to rise modestly above 3% over the final months of A major energy company increased its electricity tariffs by 15% in mid-september which will have an upward impact, while oil prices reached a 26-month high in September with Brent oil trading as high as $59.5/barrel. Crucially though, there still appears to be little evidence of domestic inflationary pressures increasing significantly. Not only has earnings growth remained muted despite the tightness of the labour market but surveys indicate that households short- and longer-term inflation expectations are still largely anchored in line with long-term norms. Meanwhile, price pressures have come well off their peak levels further down the supply chain. For example, the year-on-year (y/y) increase in producer input prices moderated to 6.2% in July from a peak of 19.9% in January, although it spiked back up to 7.6% in August as oil prices firmed and sterling suffered a dip after climbing off its early-2017 lows. Consequently, barring a major renewed weakening of sterling, we expect consumer price inflation to ease back markedly as 2018 progresses. Sterling s sharp drop in the second half of 2016 should have now largely fed through the pricing chain and the impact of this is seen as increasingly fading. Additionally, we expect oil prices to come off their recent highs with Brent oil seen as averaging $50/barrel over EY 14

17 Forecast in detail Meanwhile, we suspect that ongoing lacklustre economic growth will continue to limit domestic price pressures despite recent increased Bank of England concern over diminishing slack in the economy. Earnings growth seems likely to pick up only gradually as firms remain keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence will likely deter workers from pushing hard for markedly increased pay rises despite recent higher inflation. Consequently, we expect consumer price inflation to fall back to 2.0% around the end of 2018, and it could well dip below 2.0% during Retail price index (RPI) inflation will be higher than the consumer price index (CPI) measure over the forecast period. This is largely due to the so-called formula effect (i.e. the different methods of aggregation between the RPI and CPI measures that place an upward bias on RPI). Moreover, the spread between RPI and CPI should widen further over the back end of the forecast horizon due to our expectation that house prices will rise more quickly than general prices and that interest rates will rise gradually. 4. Activity The economy saw lacklustre growth through the first half of 2017, growing just 0.3% q/q in both Q1 and Q2. This was only half the expansion of 0.6% q/q seen in Q4 2016, and represented a sharp dilution of the economy s initial resilience after the June 2016 Brexit vote. Indeed, the performance of GDP in the first half of 2017 was the weakest six-month performance since the first half of GDP growth at 1.5% y/y in Q was the weakest since Q and down from 1.8% in Q A marked slowdown in private consumption amid an increasing squeeze on purchasing power was the prime factor behind weakened GDP growth in the first half of Private consumption rose just 0.3% q/q in Q1 and then slowed further to 0.2% q/q in Q2 (the weakest performance since Q4 2014). Total investment growth was relatively solid if unspectacular, expanding 0.5% q/q in Q1 and 0.6% q/q in Q2 with business investment up 0.8% q/q and 0.5% q/q respectively, despite indications that businesses were limiting their capital spending due to the weakened economy and Brexit uncertainties. Meanwhile, growth in government consumption was limited to 0.2% q/q in Q1 and 0.1% /q in Q2 as it was restricted by efforts to limit the still appreciable budget deficit. Growth in Q2 was also limited by a significant negative impact from inventories and the statistical adjustment following this, which had made a marked positive contribution in Q1. Consequently, domestic demand edged down 0.1% q/q in Q after a gain of 0.6% q/q in Q1. A positive development in Q2 saw net trade contribute 0.4 percentage points to GDP growth as exports of goods and services grew 1.7% q/q while imports were up just 0.2% q/q. This was in marked contrast to Q1 when net trade made a negative contribution of 0.3 percentage points. On the output side of the economy, GDP growth in Q2 was entirely reliant on the services sector which expanded 0.4% q/q. This was up from expansion of just 0.1% q/q in Q1, but was still below the growth rates seen throughout Industrial production contracted 0.3% q/q in Q2, with manufacturing output down 0.3% q/q. This followed industrial production rising 0.3% q/q in Q1 when manufacturing output rose 0.6% q/q. Construction output contracted 0.5% q/q in Q2, having grown 1.9% q/q in Q1. It appears that GDP growth is likely to come in around % q/q in Q3. Manufacturing output seemingly picked up over the summer. However, services output disappointingly dipped 0.3% m/m in July after a 0.3% m/m gain in June. Additionally, the construction sector appears to have had a very EY 15

18 Forecast in detail difficult Q3 and was likely a drag on the economy. On the expenditure side of the economy, it appears that retail sales were healthy during Q3 likely helped by more people staying in the UK during the summer holidays and from tourists being encouraged to spend by the weakened pound. However, surveys largely suggest that businesses were cautious over investment in Q3 following the economy s weakened first-half performance and a widely expressed desire for greater clarity over the UK s likely relationship with the EU once Brexit occurs in late March We forecast GDP growth at 1.5% in 2017 and 1.4% in We suspect that the economy will continue to see lacklustre growth over Q and the early months of The squeeze on consumers will remain appreciable in the near term and could very well deepen in Q as consumer price inflation is likely to briefly rise above 3% while earnings growth remains muted. Meanwhile, businesses look likely to be cautious over investment as Brexit negotiations between the UK and EU are likely to progress relatively slowly despite Theresa May s Florence speech. Recent largely robust foreign manufacturing orders fuel hopes that exports will make a decent contribution to growth helped by a still very competitive pound and healthy global growth. Although GDP growth is seen as lower in 2018 than in 2017, this masks an expected gradual pick-up in activity as the year progresses. Much will clearly depend on how Brexit negotiations develop. Our central assumption is that the UK and EU will make sufficient progress in their negotiations to agree a transition arrangement that is likely to last two years from late March Given that a transition arrangement will have to be ratified across the EU, it essentially means that agreement will need to be reached around October. Progress towards a transition agreement in the latter months of 2018 is seen as boosting business confidence and supporting a gradual pick-up in investment. Supportive to growth, the squeeze on consumers should ease appreciably during 2018 as inflation is likely to head back to 2% by the end of the year from 3% at the start, and earnings growth gradually strengthens (helped by the easing of the public sector pay cap). However, the upside for consumer spending is expected to be limited by markedly slower employment growth. Meanwhile, net trade is expected to make a modest positive contribution to growth as the pound remains at a relatively competitive level and global growth is decent. A further improvement in consumer purchasing power and firmer business investment as a UK EU transition agreement comes into effect should help GDP growth pick up to 1.8% in Consumer demand Private consumption slowed sharply during the first half of 2017 after reaching a nine-year high of 2.8% in Although wage growth remained subdued during 2016, households appetite to spend was buoyed by falls in food and energy prices and continued strong growth in employment. Private consumption growth peaked at 0.9% q/q in Q2 2016, and it has since progressively lost momentum. It softened to 0.5% q/q in Q and 0.4% q/q in Q4. Further slowdowns then occurred to 0.3% q/q in Q and 0.2% q/q in Q2, which was the weakest performance since the fourth quarter of There may have been a modest pick-up in consumer spending in Q3 2017, helped by more people staying in the UK for the summer holidays and tourists being encouraged to spend by the weakened pound. Retail sales volumes rose by a robust 1.0% m/m in August after a 0.6% m/m increase in July, while the CBI distributive trades balance reached a two-year high in September. However, car sales were weaker during Q3, indicating that consumers were wary of making big-ticket purchases. Meanwhile, consumer spending on services appears to have been limited in Q3 with the Bank of England regional agents reporting in their Q3 September survey of business conditions that consumer services turnover growth had eased slightly further, with increased reports of tightening discretionary spending. The squeeze on consumers has been painful. Admittedly, real household disposable income rose 1.9% q/q in Q2 2017, helped by strong employment growth and reduced tax payments on income and wealth EY 16

19 Forecast in detail after a spike in Q1, but this followed three successive quarterly declines, the longest successive drop since Consequently, real household income was still down 0.4% y/y in Q Meanwhile, the household saving ratio fell from a peak of 9.7% in Q to 5.4% in Q and a long-term low of 4.0% in Q before rising back up to 5.9% in Q The main support for consumer spending during 2017 has come from ongoing strong employment growth. The squeeze on consumers is likely to remain appreciable in the near term, reflecting elevated inflation and weak pay growth. Additionally, consumer confidence is relatively fragile amid appreciable concerns over the economic situation and outlook, as well as personal finances, and there is clearly caution over making major purchases. The squeeze on consumers purchasing power should increasingly ease as 2018 progresses, largely due to an expected retreat in inflation to 2% by the end of the year. There will also likely be a gradual pick-up in pay in both the private sector and the public sector (due to an easing of the pay cap). However, employment growth could very well lose momentum. Overall, we forecast consumer spending growth to slow from 2.8% in 2016 to 1.5% in 2017 and to be limited to 1.1% in However, consumer spending is expected to pick up gradually in q/q terms during It is seen as increasing to 1.6% in Housing market Housing market activity has recently shown some signs of picking up from the lows seen around June, although it is still hardly buoyant. The Bank of England reported that mortgage approvals for house purchases eased back in August after rising appreciably in July to be at the highest level since January. Specifically, mortgage approvals dipped to 66,580 in August, after rising to 68,452 in July from 64,974 in June and a seven-month low of 65,128 in April. At 66,580 in August, mortgage approvals were still well below the average monthly level of 81,710 seen during Meanwhile, the latest survey evidence generally still points to lacklustre activity. In particular, the influential Royal Institution of Chartered Surveyors (RICS) survey for August reported In terms of demand, the national series suggests there was little change in buyer enquiries during August, extending a streak of flat or modestly negative readings into a ninth straight month. Alongside this, agreed sales were again broadly flat. As such, nationally, sales have not seen any growth on this measure since November As far as prices are concerned, both the Nationwide and Halifax measures have trended down on an annual basis since the middle of Annual house price inflation on the Nationwide measure slowed to 2.0% in September, taking it down to the lowest level since June 2013 from a peak of 5.7% in March Meanwhile, annual house price inflation on the Halifax measure moderated to a four-year low of 2.1% in the three months to July, from a peak of 10.0% in the three months to March 2016, although it rose back up to 2.6% in the three months to August. August s easing back in mortgage approvals reinforces our belief that there is unlikely to be a significant upturn in housing market activity any time soon. Consequently, we expect house price growth to be EY 17

20 Forecast in detail limited to around 2.5% y/y at the end of 2017, averaging 3.7% over the year. House prices are seen similarly as up just 2.0% y/y at the end of 2018, with the increase averaging 2.1% over the year. The fundamentals for house buyers are likely to remain weak over the coming months with consumers purchasing power continuing to be squeezed by inflation running higher than earnings growth. Additionally, housing market activity is likely to be hampered by fragile consumer confidence and limited willingness to engage in major transactions. It is also very possible that potential house buyers will be concerned by the Bank of England indicating that interest rates could well rise before the end of While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since 2007 could have a significant effect on housing market psychology by focusing minds on the fact that households will likely have to deal with higher mortgage rates over the coming months and years. Having said that, the Bank of England has regularly stressed that interest rates will rise only gradually and to a limited extent. Housing market activity and prices are also likely to be pressurised by stretched house-prices-toearnings ratios and tight checking of prospective mortgage borrowers by lenders. According to the Halifax, the house-price-to-earnings ratio reached 5.71 in August This is well above the long-term ( ) average of Furthermore, mortgage lenders are under pressure from the Bank of England to tighten their lending standards. The downside for house prices should be limited markedly by the shortage of houses for sale. High and rising employment is also supportive for the housing market while mortgage interest rates will still be low even if the Bank of England does slightly tighten monetary policy. The latest RICS survey showed new instructions to sell were essentially stable in August but this followed 17 months of falls. Consequently, average stock levels on estate agents books remained close to record lows. 7. Company sector Survey evidence has repeatedly indicated that heightened uncertainties over Brexit have increased business caution and had some dampening impact on investment. Nevertheless, recently revised data from the Office for National Statistics (ONS) shows that investment has held up better than previously reported. Specifically, business investment dipped 0.4% in 2016, which was the first drop since 2009, and was down from growth of 3.7% in 2015 and 5.1% in However, it was less than the previously reported decline of 1.5% and it also needs to be borne in mind that investment was limited in 2016 by a drop in capital expenditure in the extraction sector amid weakened oil prices. Furthermore, business investment rose by 0.8% q/q in Q and by 0.5% q/q in Q2. Consequently, business investment was up 2.5% y/y in Q On the positive side, several fundamentals for business investment are currently favourable. Companies net rates of return are relatively high overall while corporate balance sheets and finances are largely healthy. Additionally, if companies want or need to borrow to invest, the cost of capital currently remains low and availability of credit is at a healthy level. Last, and by no means least is the incentive to invest for UK exporters and domestic firms competing with imports provided by sterling s weakness. Nevertheless, it is evident that heightened uncertainty over Brexit is weighing down on investment intentions. Companies are concerned about exactly what will happen at the end of March 2019 when the UK formally leaves the EU. Will there be a transition agreement in place, and if so, how long is it likely to EY 18

21 Forecast in detail last and what form will it take? Further out, businesses want to know exactly what form the UK s relationship with the EU will take, as well as what relationships the UK will form with other countries/regions. Businesses reluctance to invest in this highly uncertain environment may well be reinforced by the fact that the cost of labour is currently very cheap relative to capital. This increases the incentive for businesses to try and meet or generate any extra business by employing more workers rather than committing to potentially costly and lengthy capital investment projects. Our central assumption is that the UK and EU will ultimately make sufficient progress in their Brexit negotiations to agree a transition arrangement that is likely to last at least two years from late March Given that a transition arrangement will have to be ratified across the EU, it essentially means that agreement will need to be reached by October. Progress towards a transition agreement in the latter months of 2018 is seen as boosting business confidence and supporting a gradual pick-up in investment. Consequently, we expect business investment to rise 1.5% in 2018 after an increase of 2.1% in Investment growth is seen as picking up to 2.7% in Labour market and wages The labour market has shown ongoing marked improvement during 2017 so far despite muted economic growth. However, this is still not translating into higher earnings growth. Indeed, earnings growth has been largely softer which has added to the squeeze on consumers purchasing power, along with higher inflation. Employment rose by 181,000 in the three months to July to a record million. This took the employment rate up to an all-time high of 75.1%. Meanwhile, a 75,000 fall in unemployment to million took the Labour Force Survey (LFS) jobless rate down to 4.3%, a rate last seen in Job vacancies remained elevated at 774,000 in the three months to August. It does appear that the ongoing cheapness of labour is pricing workers into jobs. It may be that some UK companies are currently keen to take on workers or at least hold on to them given concerns over labour shortages in some sectors and reports of fewer EU workers coming to the UK since the June 2016 Brexit vote. Furthermore, with the price of labour relatively cheap to capital, in a highly uncertain economic and political environment it is particularly attractive for companies to try and meet any extra business, if they can, by taking on more workers rather than committing to potentially costly and lengthy investment. However, the big question is can UK employment sustain this strength? The suspicion has to be that sooner or later, UK labour market resilience will be diluted by extended lacklustre UK economic activity as well as heightened business uncertainties and concerns over the economic and political outlook, notably including Brexit developments. We expect employment to edge up just 0.1% in 2018 after an EY 19

22 Forecast in detail increase of 0.9% in Alongside this we expect to see a gradual uptick in unemployment, from the current rate of 4.3% to 4.6% at the end of 2018, where we expect it to stabilise. While employment growth currently remains strong and the unemployment rate at 4.3% is below what the Bank of England considers to be the equilibrium rate of 4.5%, this is still not translating into higher earnings growth. Specifically, headline growth in weekly earnings was stable at 2.1% in the three months to July. This was up only modestly from a low of 1.9% in the three months to May. Headline earnings growth fell back to 1.4% in July itself, after jumping to 2.8% in June from 2.0% in May due to bonus payments in the financial sector. Total real pay decreased by 0.4% in July. Looking ahead, there are competing forces influencing the outlook for wage growth. On the plus side, markedly increased inflation may prompt higher pay demands from some workers, as might the increasing tightness of the labour market. And compositional factors related to shifts in the structure of the workforce, which have been weighing on wage growth for some time, appear to finally be easing. A loosening of the public sector pay cap will also have some upward impact on earnings growth. But these factors will be countered by employers reluctance to pay more in the face of a lacklustre growth outlook and the pressures on firms cost bases from the introduction of the apprenticeship levy in April and ongoing auto-enrolment into workplace pensions. Additionally, companies input costs have been raised markedly by the sharp weakening of the pound. Overall, after likely slowing from 2.5% in 2016 to 2.3% in 2017, we expect average earnings growth to pick up gradually to 2.7% in 2018 and 3.1% in Trade and the balance of payments So far, the weakened pound and healthy global growth have not provided as much help to the UK economy as had been hoped for, even allowing for the fact that the trade data has been distorted by erratic factors, most notably movements in non-monetary gold. There has also been evidence that some UK exporters have used sterling s weakness to boost profit margins rather than to price more competitively in overseas markets. Nevertheless, there were some positive signs in Q2 2017, as net trade contributed 0.4 percentage points to UK GDP growth following a negative contribution of 0.3 percentage points in Q1. Real exports of goods and services rose 1.7% q/q and 4.9% y/y in Q2, after a drop of 0.3% q/q in Q1. Meanwhile, imports edged up 0.2% q/q and were up 3.4% y/y in Q2 after expanding 1.0% q/q in Q1. Additionally, manufacturing surveys from both the Purchasing Managers Indices (PMI) and the CBI have largely pointed to healthy export orders in recent months. We expect net trade to make modest positive contributions to growth over the rest of 2017 and during It can take considerable time for exchange rate movements to fully feed through to support exports and we believe it is likely that a still very competitive pound and ongoing decent global growth will support exports over the coming months. Meanwhile, still lacklustre domestic demand will likely limit UK import volumes, and this could increasingly be reinforced by the weakened pound leading to some import substitution. The current account deficit widened to 23.2 billion (4.6% of GDP) in Q from an upwardly revised 22.3 billion (4.4% of GDP) in Q1 largely due to a widening in the net income account as well as a larger shortfall on transfers. There was a narrowing of the total trade deficit in Q2. Even so, the Q current account deficit was one of the lowest in recent quarters. Indeed, the deficit had peaked at 33.0 billion (6.7% of GDP) in Q Overall, the current account deficit rose to billion (5.9% of GDP) in 2016 from 98.1 billion (5.2% of GDP) in The current account deficit should be generally lower over the coming quarters. Not only do we expect the total trade deficit to gradually come down but the primary income account should be helped by the weakened pound lifting the value of UK investment earnings overseas when translated into sterling. It is EY 20

23 Forecast in detail also very possible that UK earnings on investments overseas will do better than foreign earnings on investments in the UK, due to likely slower growth in the UK than in Europe and the US. Specifically, we forecast the current account deficit will narrow from billion in 2016 to 90.3 billion (4.4% of GDP) in 2017, and 81.1 billion (3.9% of GDP) in A further narrowing to 64.3 billion (3.0% of GDP) is anticipated in EY 21