UK faces slow growth and rising unemployment due to Brexit, think tank warns

Britain is facing three years of slow growth, rising unemployment and squeezed consumer spending as the Brexit-induced collapse in the pound triggers a radical rebalancing of the economy.

A report by influential think tank EY Item Club, which uses the Treasury's own models to make its forecasts, said the slump in sterling could prompt a "significant readjustment" of the UK economy away from consumer spending towards exports.

But the rebalancing of economic activity will be accompanied by three years of slow growth, it warned.

The Item Club expects GDP growth of 1.3% in 2017, down from an expected 2% in 2016, and just 1% in 2018.

To compound matters, unemployment is forecast to creep up from 4.8% in the final quarter of last year to more than 6% by the end of 2018.

Employment is forecast to rise by just 0.2% in 2017, fall by 0.2% in 2018 and remain flat in 2019.

Mark Gregory, EY's chief economist, said: "Whatever the outcome of the Brexit negotiations, there are clear indications that the fall in the pound and the UK's exit from the EU will entail a change in the structure of the UK economy.

"The onus will be on businesses to adapt to the slowing domestic economy by seeking opportunities overseas."

The report said the "silver lining" would be a boost to exports as the battered pound results in more businesses seeking opportunities overseas. It forecasts that exports will increase by 3.3% this year and 5.2% in 2018.

The pound has fallen more than 18% against the US dollar since the June 23 referendum and £1 now buys around 1.23 US dollars, down from 1.50 prior to the vote.

Peter Spencer, chief economic adviser to the Item Club, added: "The fall in the pound should help boost exports in the near term. However, trade performance and growth in 2019 and beyond will depend critically upon the exit terms that can be agreed with the EU27 and other countries.

"Theresa May has provided some clarity on the UK's Brexit objectives. But with elections in the Netherlands, France and Germany due later this year, it will take longer to get the same clarity on the views of the EU27 and the shape of the ensuing negotiations."

While a weak pound will boost hopes for exporters, domestic inflation is forecast to soar to 3.1% by the final quarter of 2017, eroding disposable income and hitting consumer spending.

Household real disposable income is forecast to fall by 0.3% in 2017. As a result, consumer spending growth is set to slow to 1.7% in 2017 and 0.4% in 2018 from 2.8% in 2016, the Item Club predicts.

A Treasury spokeswoman said: "The fundamentals of the UK economy are strong, and according to the IMF we were the fastest-growing major advanced economy last year.

"We have reduced the deficit by almost two thirds, cut taxes for millions of working people and employment is at a joint-record high.

"Our decision to leave the EU means there will be a period of adjustment, and the Autumn Statement set out a plan to support the economy, including £23 billion investment to boost productivity."