Reading: Hard Brexit could mean smaller economy, warns EY

Business leaders should be prepared for some significant headwinds in 2017 and beyond, according to an EY ITEM Club briefing from economist Martin Beck.

The continuing fall in sterling would be the key driver of the UK economy performance this year, he said. While it would give a boost to exporters, it would lead to higher inflation and a squeeze on consumer spending power.

With import costs rising, the net effect was likely to be a slowdown in growth, Beck predicted.

While he acknowledged that economists overplayed the effect of uncertainty among businesses both pre- and post-Brexit vote, there were signs that investment intentions had dropped after the referendum.

Recent pronouncements by the Government suggesting a ‘hard Brexit’ – leaving the Single Market and possibly the Customs Union – would continue to weigh on business investment.

Beck said economists were ‘modelling’ scenarios where a hard Brexit meant a smaller UK economy. By 2030 it could be as much as 4% smaller.

But so much was uncertain. If inflation rose to 3% by the end of this year, consumers were unlikely to be able to make up the difference through wage rises, so they would be spending less in the shops. In addition, the benefits squeeze meant low-income families, who traditionally spent proportionately more on high-street goods, would be cash-strapped.

He said EY’s winter forecast was therefore more gloomy than previous ones – with politics continuing to dictate the economics.