Slower economic growth rates are expected in the next couple of years as consumer spending slows and business investment falls, found the EY ITEM Club.
Peter Spencer, chief economic advisor to the EY ITEM Club, commented: “So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive. Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead.”
The UK economy is expected to grow by 1.9% in 2016, supported by strong consumer spending which was up 2.5%, and very low inflation of 0.8%.
Inflation is predicted to accelerate to 2.6% in 2017, before easing back to 1.8% in 2018. Whereas, consumer spending is expected to slow to 0.5% and 0.9% respectively. Additionally, exports will be adding 0.8% to GDP next year.
Peter Spencer, added: “GDP growth will become heavily dependent upon exports next year. But once the UK has left the EU certain sectors, such as aerospace, automotive, and chemicals that trade extensively with the EU, will be a lot more vulnerable and may need to be supported.”
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.
Mark Gregory, EY chief economist, 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. Businesses are now looking hard at plans and budgets, investment and hiring plans.”
The EY ITEM Club analysis points towards the UK’s exit from the EU being a relatively ‘hard’ one, with the UK post-Article 50 trading with the EU under the World Trade Organisation’s (WTO) rules.
Once the UK has left it will have new-found freedom to access cheaper international markets in food and manufactures to benefit consumers according to EY ITEM Club. However, competition from cheap imports are likely to impact UK manufacturers and farmers.
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