Think tank forecasts 'anaemic' growth in UK economy for next three years


The UK economy should brace itself for a "severe loss of momentum" following Britain's decision to exit the European Union, a think thank has said. 

EY ITEM Club has slashed its forecasts for UK economic growth from 2.3% to 1.9% this year, and from 2.6% to 0.4% in 2017, as Brexit uncertainty drives up unemployment and puts the brakes on consumer spending and business investment.

It has also knocked back its forecast for GDP growth for 2018 from 2.4% to 1.4%.

The group said Britain's decision to break free of the European Union would trigger "severe confidence effects on spending and business investment", which would lead to "anaemic" GDP growth for the next three years. 

But it expected the plunge in the value of the pound to bolster exports by 3.4% next year, with imports falling 0.3%. The move would see net exports adding 1.1% to GDP in 2017, according to the body.

Peter Spencer, chief economic advisor to the EY ITEM Club, said: "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."

The group expects sterling's trade-weighted value to be 15% lower by the end of this year compared to the last quarter of 2015. The pound has fallen from highs of 1.50 US dollars before the Brexit vote to 1.33.

It said business investment would tumble 0.9% this year and 2% in 2017, compared to previous forecasts, which pencilled in growth of 3.2% and 7.8% respectively. 

It was also predicting unemployment to rise from 5% to 7.1% by the end of 2019, with household and real disposable income set to drop by 0.5% next year. It expected consumer spending to rise 2.2% in 2016, before falling 0.6% the year after. 

Mr Spencer added: "It is vital that policymakers 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."