May 3, 2018 / 11:07 PM / 5 months ago

NIESR cuts 2018 growth forecast after weak first quarter

LONDON (Reuters) - Britain’s economy will grow less in 2018 than previously forecast after unexpectedly weak growth in the first three months of this year, the National Institute of Economic and Social Research (NIESR) said on Friday.

Candy lollipops are seen for sale in The Tower of London souvenir shop in London, Britain, April 19, 2018. REUTERS/Peter Cziborra - RC1B1C5F5960

NIESR cut its 2018 growth forecast to 1.4 percent from a February estimate of 1.8 percent, after official figures showed the economy grew just 0.1 percent in the first quarter.

“It’s not clear at this stage if it’s a soft patch or the start of a prolonged period of weakness. Our central forecast assumes that economic growth recovers,” NIESR economist Amit Kara said.

This uncertainty means the Bank of England - which also expected 1.8 percent growth this year - is likely to delay raising interest rates next week in favour of August, Kara said, and then raise rates roughly every six months thereafter.

The downgrade puts NIESR’s forecast below the 1.6 percent predicted by the International Monetary Fund last month and the 1.5 percent average forecast from financial market economists polled by Reuters.

NIESR expects growth in future quarters to average 0.4 percent, and its prediction for 2019 - when Britain will formally leave the European Union - is less changed at 1.7 percent versus 1.9 percent three months ago.

NIESR assumes Britain’s trading relationship with the EU will remain “close but not frictionless”. However, unfavourable Brexit developments might cause slower growth and higher inflation, as could further disappointment on productivity.

Chancellor Philip Hammond was also likely to give ground on his plans to cut public spending further, as he faces growing pressure to raise public-sector pay after years of real-terms cuts.

“Expenditure cuts have gone too far. We do not believe they are sustainable. We believe that there is austerity fatigue,” Kara said.

Rather than returning to surplus, as Hammond intends, the budget deficit was likely to remain around 2 percent of GDP as public spending held steady as a share of national income, NIESR predicted.

Reporting by David Milliken, editing by Larry King

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