UK Faces 3 Years of Slow Growth

The EY ITEM Club’s winter forecast has predicted that the UK economy faces three years of relatively slow growth, with household incomes being squeezed due to a slowdown in consumer spending and a rise in inflation.

Although the GDP growth in 2017 will rise to 1.3%—up from its previous forecast of 0.8%—a “tougher year” in 2018 will see growth slow to 1%. It will then pick up slowly to 1.4% in 2019 and 1.8% in 2020, economia reported.

The survey said the fall in sterling should prompt a “significant readjustment” of the UK economy, away from “over-dependence” upon domestic consumer markets towards a better performance in overseas markets.

The EY ITEM Club said that trade performance and output growth in 2019 and beyond will “depend critically” on the exit terms that can be agreed with the EU after the UK leaves the union.

In its report, the forecasting group said, “It would certainly surprise us if the Article 50 negotiations lead to a nice quick deal. We expect the negotiations to be tough and prone to setback.”

As a result, the revised forecast is more optimistic about the outlook for 2017, but more pessimistic about 2018 and 2019.

“We see the effect of an EU exit on the economy as being shallower, but more prolonged,” it added. It also warned inflation could rise to 3.1% by the final quarter of 2017, before falling back to 2% by the end of 2018.

However, the weak pound and a softer domestic market are expected to help UK exports, which are expected to increase by 3.3% this year and 5.2% in 2018. Consumer spending growth is expected to slow to 1.7% in 2017 and 0.4% in 2018, from 2.8% in 2016.

Peter Spencer, chief economic advisor to the EY ITEM Club, said, “We now expect the impact of Brexit on the UK economy to be shallower, but more prolonged than we did in October. “However, there is a sea change coming over the next three years. The fall in the pound will force the economy to be less reliant on consumer spending, leaving growth heavily dependent upon trade performance.”

Looking ahead, Spencer said, “Theresa May has provided some clarity on the UK’s Brexit objectives. But with elections in the Netherlands, France and Germany due later this year, it will take longer to get the same clarity on the views of the EU27 and the shape of the ensuing negotiations.”