The economy in 2017

But who cares what economists expect? Aren't their forecasts always wrong? Yes and no. Since 2000 the average error on forecasts at this time of year for GDP growth the following year has been just over 0.7 percentage points. This average, however, is inflated by two huge errors: the failure to foresee falls in GDP in 2008 and 2009. Excluding these, the average error has been less than 0.5 percentage points. The historic record, therefore, tells us that forecasters are (very) roughly right, except for an inability to anticipate recessions - which is of course a very big exception.

These historic error margins tell us not to expect growth of precisely 1.1 per cent: obsessing about precise numbers in economic forecasting is silly statistical fetishism. But they tell us that some sort of slowdown is likely next year. There are three big reasons for this.

One is that import prices will rise because of this year's fall in sterling, which will squeeze real incomes and hence consumer spending. Economists expect consumer price inflation to rise to 2.7 per cent by the end of 2017, its highest rate for four years, and consumer spending growth to slow from 2.8 per cent this year to 1.2 per cent next.

The problem here is that rising inflation might cause consumer spending to slow down by even more than real incomes do. Traditionally, this has been the case: there has been a positive correlation between inflation and the household savings ratio.

One reason for this is that higher inflation will impose direct real losses on anybody holding cash or non-interest-bearing bank deposits - which is pretty much everybody. Of course, if we're poorer we spend less. Another reason is that our spending decisions depend on whether we can get a fair price. And our perceptions of fairness are shaped by past prices, which means that if prices rise, demand will fall simply because prices are no longer regarded as fair.

On top of this, poorer households will face cash flow problems because prices will rise before welfare benefits do. Because some of these households will be unable or unwilling to borrow, higher prices will cause them to spend less.

A second reason for the slowdown is that uncertainty about the terms of Brexit will cause firms to delay investment decisions: the OBR expects business investment to fall by 0.3 per cent next year.

The logic here is simple. Think of investment projects as being like call options on equities: you have a choice of exercising them now or later. Common sense (as well as fancy maths!) tells us that the greater is uncertainty, the more we'll want to hold on to those options rather than exercise them.

The problem here is that the uncertainty is pretty much all on the downside. Trade Secretary Liam Fox recently promised that the UK would "replicate as far as possible" World Trade Organisation (WTO) tariff schedules. This seems to have demolished the hopes of that minority of economists who favoured Brexit that leaving the EU would be a unilateral step towards free trade. Instead, the question now is: how less free will trade be? This isn't merely a threat to exporters. In the long run, it's bad for everyone. Less free trade means less international division of labour, which in turn means lower productivity than we'd otherwise enjoy. And lower productivity means lower incomes and less spending on everything.

Now, we don't know the scale of the likely damage. But we can be pretty sure of the direction. Companies thinking of investing therefore have good reason to wait and see before doing so. At best, this means some capital spending will be postponed until 2018 or later. At worst, it means some projects won't go ahead at all. The damage is likely to be greatest to spending on longer-lived assets such as buildings, as uncertainty about the longer term affects these most.

A third problem is that fiscal policy will remain restrictive. One measure of this is cyclically-adjusted net borrowing. The OBR expects this to decline from 3.3 per cent of GDP in 2016-17 to 2.6 per cent in 2017-18. This reflects the fact that although Chancellor Philip Hammond has increased infrastructure spending, he has inherited his predecessor's squeeze on current spending. The OBR envisages this rising by only 0.5 per cent in nominal terms in 2017-18, which implies a significant real fall.

You might think that offsetting all this bad news is one big positive - that sterling's fall should boost exports. It will. But not by much, for three reasons:

■ Many exporters price to market. They set prices in foreign currency terms according to foreign market conditions. This means they won't undercut foreign competitors, and so won't see demand rise. This isn't a disaster. It means sterling will benefit exporters by raising their profit margins rather than their volumes. And just as UK exporters price to market, so too do overseas exporters. This means that UK inflation won't rise as much as it otherwise would.

■ Even where export prices do change, they don't often stimulate much greater demand. The OBR estimates that a 1 per cent fall in relative export prices raises non-oil export goods volumes by only 0.41 per cent after nine quarters.

■ Supply chains are globalised. This means that if UK firms are to export more, they must also import more. Which of course limits the improvement in net exports.

Economists, therefore, don't expect net exports to give a great stimulus to the economy - and certainly not enough to outweigh the adverse effects of lower growth in consumer spending, fiscal austerity and weak business investment.

For savers, all this poses a question: will interest rates rise in response to above-target inflation, or will they stay in an effort to support the economy?

The Bank of England has pretty much ruled out big rate rises. Governor Mark Carney recently said that the rate rises that would be needed to keep inflation at 2 per cent would be "excessively costly in terms of foregone output". Futures markets have taken the hint. They are pricing in a three-month interbank rate of only 0.5 per cent for the end of next year, which implies that they believe there's only a roughly 50-50 chance of even one rate rise next year. With inflation rising, this means savers face negative real returns on cash not just in 2017 but in 2018 too.

Our troubles, though, aren't confined to returns on cash. There are dangers for our other assets. One of these is that profits might grow even less than GDP, which might be a problem for those who invest in domestically oriented stocks.

The danger here is simple. Sterling's fall will depress UK real incomes. However, lower than usual unemployment, allied to rises in the minimum wage, could put a floor under real wages by increasing workers' bargaining power. If so, profits could take a hit - or at least the profits of domestic companies.

In truth, this is what many people expect. Dr Carney recently spoke of "the tension between consumer strength on the one hand and the more pessimistic expectations of markets on the other". This tension is, however, not necessarily puzzling. It's just what we should see if workers expect real wages to grow while the economy is in the doldrums - which means profits taking a hit.

Some simple national accounts arithmetic might clarify this. GDP is equal to the sum of consumer spending, investment, government spending and net exports:

Y = C + I + G + NX

It is also equal to wages, profits, taxes and other incomes such as rent and self-employment income:

Y = W + P + T + O

Rearranging these gives us an expression for profits:

P = (C - W) + I + (G - T) + NX – O.

Now, it's likely that investment and 'G - T' will fall as a share of GDP next year. And it's quite possible that 'C - W' will fall too if (as often happens) higher inflation causes a rise in savings. It's unlikely that these adverse developments will be outweighed by a big rise in NX.

The inference, then, is unavoidable: profits will fall as a share of GDP unless other incomes fall. A fall in those other incomes would, however, be bad news for many readers, as it would mean lower revenues for landlords or the self-employed.

Many of us, therefore, face a troubling 2017. We'll see low or negative real returns on cash, and falling profits for many domestically oriented firms. And if we don't, it might be because income from property or self-employment falls.

So, are there any reasons for hope? Yes. One, of course, is simply that things might not turn out quite so badly as economists fear.

Another is that overseas economies might do a little better next year. The OECD expects world real GDP to grow by 3.3 per cent next year after 2.9 per cent this, with emerging markets other than China and the US accelerating especially nicely - although our main trading partner, the eurozone, is expected to record much the same slow growth next year as this. This should give a slight boost to UK exports and perhaps to business confidence.

It would, however, be a major surprise if the UK can completely avoid any slowdown next year.