Home Economy News With a Year to Go to Brexit, UK Economy Falls Behind

With a Year to Go to Brexit, UK Economy Falls Behind

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Shoppers on Oxford Street in London. U.K. gross domestic product rose by 1.4% in the final quarter of 2017 compared with the same period a year earlier.
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oli scarff/Agence France-Presse/Getty Images

LONDON—As it enters its final year of European Union membership, the U.K. looks set to be the slowest-growing economy among its rich-country peers, with uncertainty over its future expected to prevent it from reaping the full benefits of the global upswing.

Prime Minister

Theresa May

toured the U.K. on Thursday to mark a year to go until the country officially leaves the bloc on March 29, 2019. In a statement released by her office, she painted Brexit as an opportunity to boost Britain’s economy by freeing it from EU rule making and opening new markets for exports.

“I am determined that our future will be a bright one. It’s a future in which we trade freely with friends and partners across Europe and beyond,” Mrs. May said.

Economists say that, for now, that future remains distant. Negotiators from London and Brussels this month agreed to terms for a transition period to bridge the gap between Brexit next year and the formal start of new trading arrangements at the end of 2020. But those new trading terms haven’t yet been agreed—an uncertainty that businesses say is hindering investment.

U.K. gross domestic product rose by 1.4% in the final quarter of 2017 compared with the same period a year earlier, according to figures published Thursday by the Office for National Statistics, the weakest expansion among the Group of Seven advanced economies.

The U.S. grew by a revised 2.9%, the Commerce Department said Wednesday. In Europe, the British expansion was easily outpaced by France, Germany and Italy, marking a reversal from previous years, which saw the U.K. race ahead as the region’s common currency area struggled to escape from a debt crisis.

Forecasts for 2018 put the U.K. once again near the bottom of the G-7 table. The Organization for Economic Cooperation and Development predicts growth of just 1.2% through 2018, the same pace it expects for Japan. The U.S. and other advanced economies are forecast to expand much faster as the global economy moves in lockstep after a long spell of patchy growth.

Business investment in the U.K. grew by 2.6% on the year in the final quarter of 2017, data Thursday showed. Investment growth has been consistently weaker than the G-7 average since the Brexit referendum in 2016, according to the Bank of England. Central bank officials expect investment to remain subdued while the contours of the U.K.’s new relationship with the EU take shape.

Growth in 2018 is once again expected to be driven by consumers, who supported the economy in the immediate aftermath of the 2016 referendum in defiance of gloomy forecasts.

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Consumer spending eased off a little in 2017 as household budgets were squeezed by meager wage growth and high inflation, which exceeded 3% late last year as a sharp fall in the pound pushed up prices. Consumers turned to debt to support spending: The proportion of total income saved by households sank to 4.9% in 2017, the lowest level since records began 1963.

The BOE anticipates consumer spending will recover a little in 2018 as wage growth ticks up and inflation gently slows. The central bank has signaled it will raise interest rates again this year and next to bring inflation back to its 2% target.

One bright spot has been exports, which have benefited from a weak pound and buoyant global demand. Net trade—exports minus imports—made its largest contribution to full-year growth since 2011, the statistics agency said. That helped narrow the country’s current-account deficit with the rest of the world to 4.1% of annual national income in 2017, the smallest gap since 2011.

Write to Jason Douglas at jason.douglas@wsj.com and Wiktor Szary at Wiktor.Szary@wsj.com

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