EY Item Club: UK economy is surprisingly resilient – but faces a “prolonged period of weaker growth”
The British economy will be hit by a "prolonged period of weaker growth" as the impact of the EU referendum begins to be felt – but will continue to be resilient, an influential forecaster has predicted.
The EY Item Club, which uses the same forecasting model as the Treasury, said GDP growth will hit 1.9 per cent this year, pushed up by a 2.5 per cent rise in consumer spending and inflation of just 0.8 per cent. (Although it's worth noting consumer confidence has dipped in the capital, according to new figures).
But that will be followed by "much slower" growth over the next couple of years, it said, with UK GDP growing by just 0.8 per cent in 2017 and 1.4 per cent in 2018.
That's partly thanks to inflation, which is expected to rise to 2.6 per cent in 2017, before easing back slightly to 1.8 per cent in 2018 (thank you, increasingly weak sterling). Meanwhile, consumer spending will grow 0.5 per cent and 0.9 per cent respectively – while business investment will fall 1.5 per cent this year and two per cent next year.
Exports: the silver lining?
Inflation may be about to shoot up because of the weak pound – but exporters are dancing in the aisles.
The Item Club said it expects exports to jump 4.5 per cent in 2017 and 5.6 per cent in 2018. In fact, exports will add 0.8 per cent to GDP next year – that's almost all the economy's growth.
The EU currently accounts for 45 per cent of UK exports – but if we're hit by a "hard Brexit", that's likely to fall, knocking four per cent off UK GDP by 2030.
Deceptive
“So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive," said Peter Spencer, chief economic advisor to the EY Item Club.
"Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead. 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.”
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