Period of ‘prolonged weakness’ for UK

BY Richard Summerfield

Since the UK voted in June to break away from the European Union, the country’s economy has been surprisingly resilient. That durability has made a mockery of the many apocalyptic predictions around Brexit which preceded the vote. Although sterling has tumbled in recent weeks, dropping under $1.21, the UK’s economy has been relatively trouble-free since the summer vote. Indeed, according to the 'EY ITEM Club Autumn Forecast' released this week, the UK’s economy is still expected to grow by 1.9 percent this year, driven by strong consumer spending, which is up by 2.5 percent, and very low inflation of 0.8 percent.

Yet despite of this positive outlook, the report claims that the UK is set for a period of ‘prolonged weakness’, thanks, in part to rapidly increasing inflation which is expected to reach 2.6 percent in 2017, before easing back to 1.8 percent in 2018. Consumer spending, too, is expected to slow to 0.5 percent in 2017 and 0.9 percent in 2018.

Uncertainty surrounding the nature of the UK’s future relationship with the EU is also likely to adversely affect corporate confidence. EY expects business investment to decline by more than 2 percent in 2017, after a drop of 1.5 in 2016.

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

Though EY’s prediction is worrying, there is a silver lining: the pound’s weakened position is great news for the country’s exporters. Exports are likely to jump 4.5 percent in 2017 and 5.6 percent in 2018, according to the report. The resiliency of the export space is contingent, however, on the nature of the UK’s future relationship with the EU. Given that 45 percent of the country’s exports are to the EU, a ‘hard Brexit’ may spell trouble for the UK’s export industry.

Report: EY ITEM Club Autumn Forecast

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