UK economic growth likely to slow, with Brexit adding further risk

UK economic growth is likely to slow over the next two years, economists at major credit rating agency S&P warned as household spending is squeezed.

S&P has joined a chorus of economic forecasters lately giving a gloomy view of UK national growth, as weak industrial data from the Office for National Statistics on Friday coupled with several months of soft data on other sectors.

UK growth will remain "moderate", S&P said in a report published on Tuesday, but acknowledged there is considerable risk that this will prove optimistic.

Brexit negotiations are the major risk, analysts feel, as the "divorce" settlement with the European Union will need to be negotiated before any future relationship with the EU is addressed, which means "should the separation negotiations stall, there would be less time left for negotiating the future trade relationship, risking a cliff edge".

Ignoring Brexit, the UK is already seeing imported inflation squeeze household budgets alongside stalling growth of wages, while business investment seen as being dampened by the uncertainty about the outcome of the Brexit talks, which S&P sees forcing the Bank of England to hold rates at their lows until mid-2019.

"We believe the boost to net exports from sterling depreciation will be insufficient to offset the weakness in domestic demand," the agency said, forecasting GDP growth of 1.4% this year, 0.9% next year, and averaging 1.4% a year in 2019 and 2020.

This comes hot on the heels of last month's OECD forecast that UK growth will slow in 2017 and 2018, owing to uncertainty about the outcome of the Brexit negotiations, to 1.6% in 2017 and then brake more significantly to 1% in 2018.

This would mark a major slowdown from 1.8% growth in 2016.

The CBI also last month forecast the UK economy will grow 1.6% this year and 1.4% in 2018.

But in May the Bank of England's quarterly inflation report forecast 1.9% GDP growth this year, though this was slightly revised down from 2%, while the Monetary policy Committee nudged up its forecasts slightly for 2018 and 2019 to 1.7% and 1.8%.

BREXIT CLIFF EDGE

If EU exit talks stall for an extended period, this could well translate into a further significant depreciation of sterling and a consequent rise in inflation, S&P's report said.

"Whether the BoE raises interest rates in response or not, the impact on growth would be detrimental because both higher interest rates and untamed inflation would depress economic activity."

"But even if sterling does not depreciate much further from current levels, consumer and -- in particular -- business sentiment could suffer if negotiations stall. Businesses might then start activating their contingency plans, leading to sizable relocations of operations, workers, and consequently a fall in investment and consumer spending," the report concluded, all of which would mean further cuts to the forecasts.