Business

UK economy 'faces weaker growth', Item Club report says

Welder Image copyright Thinkstock

Britain's economy faces a "prolonged period" of weaker growth as consumer spending slows and business curbs investment, according to a report.

Although the EY Item Club think tank predicts the economy will grow 1.9% this year, it expects that performance to fizzle out as inflation rises.

The economy's stability since June's Brexit vote was "deceptive", EY said.

Meanwhile, a senior Bank of England official told the BBC that inflation may surpass its 2% target.

The Bank's deputy governor Ben Broadbent told Radio 5 live that sterling's weakness would fuel inflation, but that controlling prices with tighter monetary policy could hit growth and jobs.

The dilemma facing policymakers was underlined in the Item Club report.

It expects inflation to jump to 2.6% next year before easing back to 1.8% in 2018. That will cause growth in consumer spending to slow from an expected 2.5% this year to 0.5% in 2017 and 0.9% the year after, the report said.

Business investment is also forecast to fall due to uncertainty surrounding Britain's future trading relationship with the EU, dropping 1.5% this year and more than 2% in 2017.

EY predicts that the impact of weaker consumer spending and falling investment will cause UK GDP growth to drop sharply to 0.8% next year, before expanding to 1.4% in 2018.

Vulnerable sectors

Peter Spencer, chief economic advisor to the EY Item Club, said: "So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive.

"Sterling's shaky performance this month provides a timely reminder that challenges lie ahead. As inflation returns over the winter it will squeeze household incomes and spending.

"The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth," he said.

Image copyright Reuters
Image caption Deputy governor Ben Broadbent told 5 live that monetary policy involves a "trade off"

The report said that exporters will benefit from the depreciation of sterling, which last week tumbled against a basket of currencies. Exports will increase by 4.5% in 2017 and 5.6% in 2018, EY forecast.

But Mr Spencer did not expect this to be enough to offset a wider slowdown.

"With activity in the domestic market flat, GDP growth will become heavily dependent upon exports next year," he said.

'Undesirable consequences'

"But once the UK has left the EU certain sectors, such as aerospace, automotive, and chemicals that trade extensively with the EU will be a lot more vulnerable and may need to be supported by subsidies and more robust industrial policies," he said.

Some of the economic challenges were spelled out in Mr Broadbent's BBC interview with 5 live's Sean Farrington.

The deputy governor, echoing remarks by the Bank's governor Mark Carney last week, said that letting inflation run ahead of the 2% target might ensure the economy does not suffer.

Tighter monetary policy to meet the target could lead to "undesirable consequences" such as lower growth and higher unemployment, he said. It's a "trade off", he added.

Correction 26 October 2016: The headline on this story has been changed to clarify that the report predicted weaker growth rather than a weakened economy.

More on this story