Inflation and unemployment rising

UK poised for three years of ‘anaemic’ post-Brexit growth

Philip Hammond SkyBritain’s new Chancellor was today handed a stark warning of a stagnating economy following the decision to pull out of Europe.

A new economic forecast says the the UK is poised for three years of ‘anaemic’ growth, rising unemployment and lower disposable income following the Brexit vote.

It predicts interest rates to be cut to zero by November, inflation to rise above 2% by the end of this year and unemployment to hit 7.1% by end of 2019.

The bleak outlook facing new Chancellor Philip Hammond (pictured) is forecast by the EY Item Club.

It says spending and investment will fall sharply, though the falling pound – expected to be 15% lower year-on-year – should help cushion the slowdown by boosting exports.

Item Club says the economy will take a “very different path” to the one expected three months ago.

It has downgraded GDP growth this year from 2.3% predicted in April to 1.9%, and to just 0.4% in 2017, against its earlier 2.6% forecast.  In 2018 it will ris to 1.4%, but this is also down from earlier expectations of 2.4%.

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

Item Club believes that the longer-term outlook for the economy will be determined by domestic policies such as regulation and migration 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. 

It expects the Bank of England’s 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.

Peter Spencer, chief economic advisor to the Item Club, says: “The economy is set to suffer a severe loss of momentum in the second half of this year.

“Heightened uncertainty is likely to hold back business investment, while consumer spending will be restrained by a weaker jobs market and higher inflation.

“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.

“But amongst the gloom, the weaker pound provides one silver lining to exporters, particularly those selling to the US and emerging markets.”

Scotland faces additional layer of uncertainty

Duncan Whitehead, EY lead for Economic Advisory in Scotland, says: “Scotland faces an additional layer of uncertainty due to the preference for EU membership expressed both by the electorate and the Scottish Government.”

Consumer won’t be left unscathed

The aftermath of the EU referendum result may deliver some positive news for consumers in the form of lower interest rates. However, heightened uncertainty, higher inflation and a weaker jobs market point to a gloomier overall outlook.

Peter Spencer continues: “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.

Exports are a bright spot

Reflecting the fall in the pound and the weakness in domestic demand, the Item Club predicts 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.

Peter Spencer adds: “The UK is uniquely placed in exporting services and enjoys a reputation for high value added pharmaceuticals, designer-label and branded consumer products. As high growth emerging markets move away from investment towards consumption, UK exporters need to focus their energies on seizing the benefits that this switch creates.”

Opportunities post the initial shock

Peter Spencer concludes: “It is vital that policy makers respond positively to the challenges and opportunities that lie ahead. 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.”

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