Better prospects ahead

Outlook brightens on business friendly Brexit

Output expected to grow in medium term

Medium term economic prospects have brightened as a more business friendly Brexit deal looks likely, according to a key forecaster.

UK growth will continue to struggle this year and next, as consumer spending feels the squeeze from rising inflation and muted earnings growth, says the EY Item Club.

However, it believes  the outlook is looking stronger after the general election result forced a softening of Prime Minister Theresa May’s hardline approach to the EU talks. 

The Item Club’s summer report has downgraded its growth forecast for this year to 1.5% from 1.8% that it was predicting in its April report. But it is more confident about growth prospects for 2019 and 2020.

The report says that the general election result has increased the chances of a free trade agreement, which should provide greater certainty to help stimulate business investment, as well as a looser fiscal stance.

Peter Spencer, chief economic adviser to the Club, said: “A softer Brexit should improve the medium term outlook – especially in sectors like the motor industry where investment has been held back by Brexit uncertainty.” 

Business investment is expected to be flat in 2017, followed by growth of 0.1% in 2018. However, assuming that the UK secures a transition agreement after Brexit and moves towards a free trade agreement, investment should strengthen to 2.1% in 2019.

The forecast sees CPI inflation averaging 2.4% in 2018, before coming back to below the 2% target by the end of next year.

Employment should increase by 0.9% this year, 0.1% in 2018 and 0.4% in 2019. This compares to growth of 1.7% in 2015 and 1.4% last year. 

Real household disposable income is forecast to fall by 0.2% in 2017, before recovering by 1.1% next year.  

The UK’s trade balance has continued to disappoint but exports are expected to receive a boost from the weak pound and a more buoyant global economy. While this external support is unlikely to be enough to offset a weaker home market, net trade should be an important source of support to the economy.

Export volumes are forecast to increase by 3.8% this year and 3.9% in 2018, while import volumes increase by 3.2% and 2.8% respectively. Net exports are expected to add 0.1% to GDP this year and another 0.3% in 2018.

> A CBI survey reveals that 60% of firms believe Brexit has not affected their investment decisions.

Rain Newton-Smith, CBI chief economist, said: “It is reassuring that the majority of businesses that responded to our survey do not feel that Brexit has changed these vital spending plans.

“But we must have our eyes wide open: an overwhelming number (98%) of those that did report an impact said it was negative. Government must do all it can to reverse this. Today’s investments are tomorrow’s jobs.”

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