South: EY ITEM Club weighs up economic situation

The EY ITEM Club has revised its GDP growth forecast for this year down from 2.3% to 1.9%, and down from 2.6% to 0.4% in 2017. It sees Brexit uncertainty as likely to hold back business investment and consumer spending, resulting in a rise in unemployment. Exports, however, are likely to be boosted by a weaker pound which will benefit those selling to the US and emerging markets.

The forecast is that the UK economy, post-referendum, will take a very different path to the one expected three months ago. While the fundamentals will not change in the short term, there are likely to be severe confidence effects on spending and business investment, resulting in anemic GDP growth for at least the next three years.

Business investment is expected to see a larger relative hit, falling by 0.9% in 2016 and by 2% in 2017 – down from the April forecast of growth of 3.2% and 7.8% respectively.

On the other hand, the prediction is that exports will increase by 3.4% in 2017 while imports will fall by 0.3%. Consequently, the forecast expects net exports to add 1.1% to GDP next year, the strongest contribution from this source in six years. 

The EY ITEM Club believes that the longer-term outlook for the economy will be determined both by domestic policies in areas like regulation and by the UK’s ability to secure trade deals with the EU and other markets. The forecast assumes that post-2019 the UK will be able to negotiate a free-trade agreement with the EU similar to the recent EU-Canada deal, which keeps trade between the UK and the EU free of tariffs.

Peter Spencer, chief economic advisor to the EY ITEM Club, commented: “Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy, compared to the trend that seemed possible prior to the vote.” 

Richard Baker, managing partner at EY across the Thames Valley and South Coast, said: “Government needs to quickly introduce measures to help offset Brexit blues, support the economy and continue to attract foreign investment in the regions. The focus now needs to be on making sure that the UK negotiates the right trade deals that will allow access to key markets.”

He added: “As the world’s fifth largest economy, the UK will continue to be an integral piece of the global jigsaw. While investors value the UK’s access to the single market, we shouldn’t forget that they also rate the UK’s quality of life, diversity and culture, education, stability of social climate, telecommunications, and labour skills highly. These underlying fundamentals have not changed. 

By the end of the year the EY ITEM Club expects sterling’s trade-weighted value to be 15% down on the level in Q4 2015. This will not be enough, however, to prevent a significant deterioration in the UK’s growth outlook, compared to the predictions the EY ITEM Club made in April.

The EY ITEM Club expects the Monetary Policy Committee (MPC) to cut interest rates to zero by November but says that inflation is likely to rise above 2% by the end of this year, averaging 2.5% in 2017, before slowing to 1.6% in 2018. 

The forecast sees unemployment rising from 5% currently to 7.1% by the end of 2019. This will have a knock-on impact on household real disposable income, which is forecast to fall by 0.5% in 2017. Consumer spending is expected to increase by 2.2% this year but then drop by 0.6% in 2017, the first decline since 2011.

Spencer continued: “Consumers have for some time now punched above their weight in driving the economy’s expansion. However, 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. 

“Short-term, while we still have full access to the single market, the fall in the exchange rate will provide opportunities, while the predicted increase in inflation and unemployment will help to rebalance the economy away from consumption. 

“In the longer term, if the UK does lose unfettered access to the single market, the need to offset the damage will make it vitally important for the UK government to use its new-found freedoms over areas like trade and regulation successfully.”