UK set to avoid recession but wage growth will remain subdued

Britain will not slip into a recession next year but its economic growth will lag behind the Eurozone's – while wages will struggle to keep up with inflation, a new survey has forecast.

Having performed better than expected in the immediate aftermath of last year's Brexit referendum, the UK economy has since begun to stutter, growing 1.7% in the second quarter, down from the 2% reading recorded in the previous three months.

At the same time, the pound has lost over 13% of its value and was last trading at $1.2961 and €1.1058. Bank of England (BoE) Governor Mark Carney has repeatedly warned uncertainty surrounding Brexit would act as a burden on the UK's economy, while simultaneously driving inflation higher.

However, according to a Reuters poll released on Thursday (10 August), Britain's economy will avoid recession and grow 0.3% per quarter until the middle of 2018, compared with a 0.4% rate of expansion in the Eurozone.

Meanwhile, inflation is expected to peak at 2.9% in the last three months of 2017, but the BoE is unlikely to tighten its monetary policy until 2019 at least.

Last week, the Bank kept interest rates unchanged at a historic low of 0.25% and revealed it expects inflation as measured by the consumer price index (CPI) to peak at 3% in October this year.

Inflation is then forecast to fall to 2.6% in 2018, before settling at 2.2% in both 2019 and 2020 respectively, marginally above the Bank's 2% target.

The threshold was breached for the first time in four years in March this year and inflation has been running above the BoE's intended target ever since, hitting a four-year high of 2.9% in May .

"UK monetary policy is likely to be (as it should be) 'data dependent'," said Simon Wells from HSBC.

"The data are likely to stay fairly weak as consumers continue to face an income squeeze and firms wait for more clarity on the Brexit deal before growing investment rapidly."

However, while inflation might slowly decline in 2018, wages will not grow quickly enough to keep up with it, with households' budgets set to become increasingly squeezed next year. Over the last six months, Britons have seen real wages fall behind inflation and the 70 economists polled by Reuters expect wages will rise 2.2% this year and 2.5% in 2018, while inflation will average 2.7% and 2.6% in 2017 and 2018 respectively.

Crucially, the survey's estimate for wage growth is lower than the BoE's forecast for a 3% increase next year.