UK growth to decline sharply

BY Richard Summerfield

The UK will experience economic growth of just 2.4 percent in 2015, according to a recent report from forecasting group EY ITEM Club. The forecast is significantly lower than predictions issued by the Bank of England, the Confederation of British Industry and the International Monetary Fund.

In its ‘Autumn Forecast’ the EY ITEM Club noted that the UK’s changing economic fortunes are likely to be based on uncertainty both at home and abroad. Political uncertainty in the UK will likely deter businesses from investing in the coming year.

Potential constitutional reform, the impending general election and a possible 2017 EU referendum are all expected to curtail investment activity. Further, burgeoning geopolitical risks, most notably the crisis in Ukraine, have heavily dented business confidence in the UK’s key European markets.

Peter Spencer, chief economic adviser to the EY ITEM Club, said “The forecast for GDP growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms. Looming political uncertainty risks denting corporate confidence - the question now is how will these risks play out? I expect caution to become the order of the day.”

Although, as the report notes, growth in business investment in the UK will have increased to 9 percent in 2014 compared with 2013, it will drop sharply in 2015 to 5.8 percent. The faltering European recovery and the relative devaluation of the euro compared with the pound have had a detrimental effect on the UK’s export business. According to Mr Spence, the outlook for UK exports appears to be “dreadful”.

Weaker global economic growth and stagnating UK wages and productivity will all combine to keep interest rate rises at bay. In the UK, interest rates have been at 0.5 percent for more than five and a half years. The report also predicts inflation will remain low going forward. Inflation is currently at a five-year low of 1.2 percent, but that figure is likely to increase marginally, averaging 1.3 percent next year.

Report: EY ITEM Club: Autumn Forecast 2014

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