UK economy to enter 'prolonged period of weaker growth' in Brexit's wake: EY ITEM Club

UK economy to enter 'prolonged period of weaker growth' in Brexit's wake: EY ITEM Club

The UK’s economy is about to enter a “prolonged period of weaker growth”, although it will be boosted by exports, as a result of the slide in the value of the pound, according to the EY Item Club’s quarterly economic forecast. 

The forecast sees the UK economy growing by 1.9% in 29016 – supported by strong consumer spending (up by 2.5%) and very low inflation (0.8%) – but says rising  inflation and falling business investment will result in GDP growth of just 0.8% in 2017.

The EY ITEM Club is a non-governmental forecasting group based in the UK which is said to be the only such forecaster to use HM Treasury’s model of the UK economy. The acronym “ITEM” in ITEM Club stands for “Independent Treasury Economic Model”, and the ITEM Club’s work has been sponsored by EY, formerly Ernst & Young, for the past 25 years.

In a statement summarising its findings, the forecaster noted that the UK economy “has shown greater resilience than many had anticipated since the EU referendum vote”, but noted that “a slowdown in consumer spending on the back of higher inflation and falling business investment will result in much slower growth rates over the next couple of years”.

With inflation forecast to accelerate to 2.6% in 2017, before easing back to 1.8% in 2018, “consumer spending is expected to slow to 0.5% and 0.9% respectively,” the EY Item Club statement continues.

“At the same time, uncertainty around the UK’s future relationship with the EU is likely to weigh on corporate confidence, knocking business investment back by more than 2% in 2017, after a fall of 1.5% this year.

“As the UK’s trading relationship with the EU becomes clearer, growth in capital spending is forecast to slowly recover to 0.3% in 2018.

“As a result, the EY ITEM Club forecasts GDP growth of 0.8% in 2017 and 1.4% in 2018.”

Export boost provides bright spot on the horizon

With respect to exports, the EY ITEM Club forecast projects the weak pound will result in exports increasing by 4.5% in 2017 and 5.6% in 2018. As noted above, with net exports expected to add 0.8% to GDP next year, they are seen as accounting for almost all of the economy’s expected growth.

Once the UK has left the EU, making use of the UK’s new-found freedoms to access cheaper international markets in food and manufactures will benefit consumers, the EY ITEM Club forecast predicts. “However, competition from cheap imports [is]  likely to impact UK manufacturers and farmers, and their exports to the EU will face tariffs and other barriers,” it adds.

‘Challenges lie ahead’

Peter Spencer, chief economic adviser to the EY ITEM Club, said that although it might look as though the UK economy was “taking Brexit in its stride”, this wasn’t in fact the case.

“Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead,” he said.

“As inflation returns over the winter, it will squeeze household incomes and spending. The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth.”

EY chief economist Mark Gregory added: “The economy has not fallen off a cliff since the referendum, but recent developments have led to a more downbeat assessment of the outlook. The holidays are over, and businesses are now looking hard at plans and budgets. Both investment and hiring plans are likely to be squeezed in the current environment.”

To read and download the EY ITEM Club report, click here.