British economy to slowdown in next few years, says EY Item Club

The British economy will experience a slowdown in coming years as consumer spending and business investment falls on a rise in inflation, a think-tank said on Monday.

The EY Item Club’s autumn forecast showed that gross domestic product is expected to grow 1.9% this year, due to a 2.5% rise in consumer spending and on the back of low inflation of 0.8%.

However, next year inflation is predicted to increase to 2.6%, before easing to 1.8% in 2018, while consumer spending slows to 0.5% and 0.9%.

It said that the economy's stability since the country voted to leave the EU in June’s referendum was “deceptive”.

Business investment is also expected to take a knock from the uncertainty arisen from the type of Brexit sought with trading block as it weighs on corporate confidence.

The report anticipates business investment to scale back by more than 2% next year after 1.5% this year.

It said that once the country’s relationship with the EU does become clearer, spending is expected to recover to 0.3% in 2018.

This will result in a 0.8% growth in GDP next year and 1.4% in 2018.

There is debate on the type of Brexit the government should seek, a ‘hard’ Brexit - complete withdrawal from the single market, curbs on migration and switching to World Trade Organisation rules, or ‘soft’ Brexit - maintain access to the single market to protect passporting rights for financial institutions to conduct business across the continent.

EY Item Club said the country was heading towards a ‘hard’ Brexit with country trading with EU using WTO rules once Article 50 is triggered, which the prime minister said will be the end of March 2017.

To offset the cost of losing access to the single market it will depend on the country accessing cheaper world markets in food and manufactures to provide some compensation while Britain negotiates over the longer term.

Peter Spencer, chief economic advisor to the EY ITEM Club, said: “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. 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.”

Weak sterling

Exporters are thought to benefit from the fall in sterling, which tumbled in the wake of the Brexit vote to near 30-year lows against the dollar. The report said exports would rise by 4.5% next year and 5.6% in 2018.

Once the UK has left, the think tank said making use of the country's ability to access cheaper international markets in food and manufactures will benefit consumers, however competition from cheap imports are likely to impact UK manufacturers and farmers while their exports to the EU would face tariffs.

Spencer said: “With activity in the domestic market flat, 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 by subsidies and more robust industrial policies.

Earlier, the Bank of England deputy governor Ben Broadbent said the weak pound acted as an important shock absorber after the Brexit vote and that it would fuel inflation, while controlling prices would curb growth and increase unemployment.

He told BBC Radio 5 Live: “Having a flexible currency is an extremely important thing, especially in an environment when your economy is facing a shock that’s different from your trading partners.

“In the shape of the referendum, we’ve had exactly one of those shocks. Allowing the currency to react to that is a very important shock absorber.