UK economy will have to weather short, sharp shock after Brexit vote
The UK economy will have to weather a short, sharp shock, with Brexit uncertainty holding back both business investment and consumer spending, according to a leading economic forecasting group.
As forecasters cut growth expectations, a survey of finance chiefs showed caution increasing since the referendum, and retailers reported fewer shoppers on the high street than a year ago.
Severe dents to confidence mean the post-referendum economy is on “a very different path” from three months ago, said the EY Item Club, a forecasting group that uses Treasury modelling. It has slashed its predictions of economic growth for the next few years.
In April, Item said the UK’s GDP would grow by 2.6% in 2017 – a figure it now expects to be barely 0.4%. It expects the pound to have fallen 15% in a year by the end of 2016, and decline further through the decade.
Consolation for borrowers may come from marginally lower interest rates in the short term, while a severely weakened pound will help exports – although not enough to prevent a significant deterioration in the UK’s prospects.
Peter Spencer, chief economic adviser at Item, said: “Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy, compared with the trend that seemed possible prior to the vote.”
Steve Varley, chairman of EY UK, said the next two years would be “undoubtedly challenging”. He added: “The UK government will need to quickly introduce measures to help offset Brexit blues, support the economy and continue to attract foreign investment.
“The focus now needs to be on making sure that the UK negotiates the right trade deals that will allow access to key markets.”
Unemployment is forecast to rise from 5% to 7.1% by the end of 2019, cutting household disposable income. Consumer spending is expected to fall next year – the first decline since 2011.
Spencer said: “Worries about jobs are likely to see shoppers hold back on big ticket purchases, such as cars and housing-related spending. At the same time, higher inflation off the back of sterling’s weakness will squeeze growth in real incomes.”
