GDP growth was revised down to +1.7% in 2017 (from a flash estimate of +1.8%). While the headline figure indicates a second year of resilient economic expansion after the Brexit decision, the detailed breakdown shows a marked slowdown in domestic demand, by two thirds compared to 2016. The acceleration of external demand and the weaker GBP boosted UK exports and saved GDP growth as net exports made a positive contribution to it for the first time since 2011. Going forward, 2018 should confirm the UK’s economic resilience as households are confident about their future financial situation. The inflation rate should stabilize at an elevated level (2.6%) and wage growth should accelerate due to rising labor market shortages. As external demand stays strong (we expect almost +4% real export growth in 2018), corporate investment should expand, helping companies improve their margins by reducing the UK’s supply chain dependency on foreign input. Overall, we expect +1.5% GDP growth in 2018 which should in turn pave the way for two interest rate hikes by the Bank of England (+50bp to 1%). As 85% of bank lending to companies and 40% of households’ mortgages are at floating rates, this should induce higher interest expenditures for both companies and households.
