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UK economy sending out mixed signals

International
London - Britain's economy is sending mixed signals about its readiness for Brexit just as British Prime Minister Theresa May launched the process of pulling the country out of the EU.

Economic growth was resilient in 2016, confounding forecasts of a quick and painful hit after June's Brexit vote.

There have been recent signs that exporters are benefiting from the pound’s fall and a pick-up in the world economy. But consumers, typically the main drivers of British growth, appear to be turning more cautious.

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EU Council President Donald Tusk gets British Prime Minister Theresa May's formal notice from UK Permanent Representative to the EU Tim Barrow in Brussels, Wednesday, March 29, 2017. Barrow hand-delivered the letter signed by Britain's Prime Minister Theresa May that will formally trigger the beginning of Britain's exit from the European Union. (Emmanuel Dunand, Pool via AP)

The economy grew by 1.8 percent in 2016, second only to Germany among the Group of Seven big rich nations. In quarterly terms, growth sped up at the end of last year, prompting the Bank of England (BOE) to raise its forecast for early 2017. The BOE and the government's forecasters expect growth of 2 percent this year. Other economists are less optimistic, forecasting growth of 1.6 percent, according to a poll.

Most of the BOE’s policymakers expect the pace of growth to slow as 2017 progresses but they showed “differing degrees of confidence” about that forecast at their meeting this month when one rate-setter voted to raise borrowing costs and others said they might follow suit.

Inflation is rising quickly in response to the sharp fall in the value of the pound since the Brexit vote and the rise in global oil prices over the past year. It jumped to 2.3 percent in February and the BOE predicts it will peak at 2.8 percent in the first half of next year, above its 2 percent target. Many economists say inflation is heading above 3 percent.

Read also: #Brexit likely to affect SA firms

British workers have seen their pay eaten away by rising prices for many of the years since the financial crisis. A brief respite, caused by inflation’s fall to zero in 2015, is set to end soon. Pay growth, adjusted for inflation, was the lowest since October 2014 in the most recent data. The BOE expects pay will rise 3percent in 2017, up from the most recent reading of 2.2 percent, but its forecasts have often proven too optimistic.

Britain’s shoppers proved the forecasters wrong by carrying on spending freely after the Brexit vote, helping the economy to withstand the shock. But that seems to be changing. Retail sales shrank at the fastest rate in nearly seven years during the past three months, despite a pick up in February.

Data published on Wednesday showed growth in consumer credit in the three months to February was the weakest since July 2015, at 8.7 percent.

However, consumer confidence has remained robust and house prices continue to grow, adding to the mixed picture.

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