UK Outlook. Steady as she goes for the economy. February Economic Research Unit

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1 UK Outlook February 218 Steady as she goes for the economy Eight months into the formal Brexit negotiations, sufficient progress has been made on Phase 1 issues and the focus has moved to the future relationship with the EU and a possible transition period. Against this backdrop, the UK economy has been expanding at a moderate pace, though activity last year was slightly better than expected. Partly on account of this, GDP growth of 1.7% is now forecast for 218, up from 1.4% previously. Assuming the status quo is maintained in terms of current UK-EU trading arrangements, growth of 1.% is projected for 219. The forecasts allow for some rebalancing of the economy, with softer consumer spending partially offset by firmer exports. Elevated inflation will continue to weigh on households income and spending in the period ahead, notwithstanding ongoing job gains. At the same time, the weak pound will underpin export growth, as will the robust global economy, which should also support business investment though Brexit uncertainty remains a drag. On the policy front, recent budget measures imply less of a restraint on activity than previously planned, whereas the Bank of England has raised interest rates and says further increases may be necessary. This is a headwind for consumers and businesses, albeit future rate hikes are likely to be limited. Sterling has been more stable against the euro lately, trading in a range of 87p to 9p, and will be sensitive to the ebb and flow of the Brexit negotiations. Economic Research Unit

2 Economic Overview Recent Developments GDP 1.8% YoY 217 Remains weak Multi-decade low for unemployment YoY January 218 Brexit June 21 March 217 June 217 Referendum on EU membership Article 5 triggered Withdrawal negotiations begin January 218 Talks turn to Phase 2 Framework for future UK-EU relationship December 217 Progress on Phase 1 issues of citizens rights, financial settlement and Irish border Possible transition period Outlook High inflation squeezes incomes and consumer spending Uncertainty weighs on business investment 217e GDP Consumer Spending Investment Exports Employment Unemployment Rate Inflation 1.8% 1.4%.2%.5% 1.1% 4.4% 2.7% Weak pound & improving global economy support exports 218f 1.7% 1.% 2.5% 4.2%.7% 4.% 2.7% Interest rate increases a headwind for households and firms 219f 1.% 1.% 2.%.%.% 4.% 2.2% Sources: Bank of Ireland, ONS, Bloomberg, HM Government, EU Council

3 Consumer Spending slowing Growth in consumer spending slowed to 1.5% year-onyear in the first three quarters of 217, with retail sales also soft in Q4 and again at the start of Retail Sales (annual % change, volume) Households downbeat Consumer confidence has been trending down for some time now, reflecting concerns about the economy and the cost of living as sterling s fall pushes up prices Consumer Confidence (net balance) Source: GfK Incomes under pressure Real disposable income was down.4% on an annual basis in Q1-Q of last year, forcing households to draw on their savings. Earnings growth is fairly subdued, though factors such as skill shortages and recruitment difficulties may provide support Household Gross Disposable Income (annual % change, 4-quarter moving average, constant prices) Credit growth easing 12 Consumer credit was up 9.5% year-on-year in December 217 but growth is easing and the Bank of England has started to raise interest rates Stock of Unsecured Lending to Households (annual % change) Source: Bank of England Full employment 9 While the labour market is doing well the unemployment rate is at a multi-decade low of 4.% job gains are set to moderate Unemployment Rate (%) Headwinds abound With incomes feeling the pinch, growth in consumer spending is expected to be relatively weak at 1.% this year and 1.% next year. 1.4% 1.% 1.% 217e 218f 219f Consumer Spending (annual % change, constant prices) Source: Bank of Ireland

4 Business Brexit woes Business investment averaged 2.% year-on-year in Q1-Q 217. Favourable financing conditions have been supportive, but Brexit uncertainty remains a drag Business Investment (annual % change, constant prices) New peak for exports 15 New Peak The depreciation of sterling is boosting exports, which rose at their fastest pace in more than years over the year to Q Previous Peak Exports ( bn, constant prices) Supportive global economy 21 Exporters are also benefiting from the global upswing, with the latest manufacturing PMI reporting increased sales to mainland Europe, North America, China and elsewhere. 1 2 Global GDP (annual % change, constant prices) Source: IMF 217e 218f 219f 4 Investment intentions improving 2 The need to improve efficiency and expand capacity is contributing to some improvement in firms investment intentions, with the better external environment also helping Investment Intentions Next 12 Months Manufacturing Services (net balance) Source: Bank of England Housing investment continuing Private sector investment in dwellings increased by 8.2% year-on-year in the first three quarters of 217, though high frequency data suggests the pace of activity is now moderating Private Sector Investment in Dwellings (annual % change, constant prices) Mixed outlook.2% 2.5% 2.% Solid growth is in prospect for exports, with investment also forecast to increase in 218 and 219, but at a more modest pace..5% 4.2% 217e 218f Investment Exports (annual % change, constant prices) Source: Bank of Ireland.% 219f

5 Policy & Markets Elevated inflation Consumer price inflation came in at.% in January 218, still well above the 2% target rate CPI (annual % change) BoE Target Rate (%) & Bank of England Interest rates on the up The Bank of England raised interest rates by 25bps to.5% in November the first increase in a decade - with further hikes on the cards Bank Rate (%) Market Expectations Source: Bank of England & Bloomberg Sterling steadier steadies The pound has been more stable against the euro recently, trading between 87p-9p. It remains off its pre-brexit levels and will be sensitive to the ebb and flow of the withdrawal negotiations / Source: Thomson Reuters Brexit negotiations move on The focus of the Brexit talks has turned to the framework for the future UK-EU relationship and a transition period, though there are substantive differences between the two sides on elements of the latter Economic Policy Uncertainty Index Source: Baker, Bloom & Davis Northern Ireland Modest growth High frequency indicators point to continuing growth, with the unemployment rate falling to.8% in September-November 217 from 5.% a year earlier Composite PMI (>5=expansion, LHS) Unemployment Rate (%, RHS) Source: Ulster Bank/IHS Markit & ONS 4 2 Power sharing talks collapse The absence of an Executive over the past year has weighed on household confidence, with the latest round of talks to restore devolved government ending without agreement Q4 217 Q4 Consumer Confidence (28 Q = 1) Source: Danske Bank

6 Forecasts 217 (e) 218 (f) 219 (f) Personal Consumption 1.4% 1.% 1.% Government Consumption.4% 1.1% 1.1% Investment.2% 2.5% 2.% Exports.5% 4.2%.% Imports.2%.% 2.% GDP 1.8% 1.7% 1.% Employment Growth 1.1%.7%.% Unemployment Rate (Average) 4.4% 4.% 4.% CPI 2.7% 2.7% 2.2% Annual % change unless otherwise stated; personal consumption, government consumption, investment, exports, imports and GDP are in constant prices Upcoming Events 4 th 17 th rd Italian Elections 22 nd BOE MPC Meeting Labour Market Data Dec-Feb 218 Local Elections March April May 27 th 1 th 22 nd - 2 rd European Council Meeting Q4 217 National Accounts Q1 218 Preliminary GDP Estimate BOE MPC Meeting and Inflation Report 29 th 25 th Q1 218 National Accounts Contact Us economics@boi.com Conn Creedon Senior Economist +5 () Alan Bridle UK Economist & Market Analyst Dr. Loretta O Sullivan Group Chief Economist +5 () Michael Crowley Senior Economist Andrew Hopkins Economist Natalie Tennyson Media Relations Manager +5 () () () Disclaimer This document has been prepared by the Economic Research Unit at The Governor and Company of the Bank of Ireland ( BOI ) for information purposes only and BOI is not soliciting any action based upon it. BOI believes the information contained herein to be accurate but does not warrant its accuracy nor accepts or assumes any responsibility or liability for such information other than any responsibility it may owe to any party under the European Union (Markets in Financial Instruments) Regulations 217 as may be amended from time to time, and under the Financial Conduct Authority rules (where the client is resident in the UK), for any loss or damage caused by any act or omission taken as a result of the information contained in this document. Any decision made by a party after reading this document shall be on the basis of its own research and not be influenced or based on any view or opinion expressed by BOI either in this document or otherwise. This document does not address all risks and cannot be relied on for any investment contract or decision. A party should obtain independent professional advice before making any investment decision. Expressions of opinion contained in this document reflect current opinion as at 1th February 218 and is based on information available to BOI before that date. This document is the property of BOI and its contents may not be reproduced, either in whole or in part, without the express written consent of a suitably authorised member of BOI. The Governor and Company of the Bank of Ireland is regulated by the Central Bank of Ireland. In the UK, The Governor and Company of the Bank of Ireland is authorised by the Central Bank of Ireland and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority and regulation by the Financial Conduct Authority are available from us on request. The Governor and Company of the Bank of Ireland is incorporated in Ireland with limited liability. Registered Office 4 Mespil Road, Dublin 4, Ireland. Registered Number C1.