UK economy set for a “hard rebalancing”

The recent slump in sterling should prompt a significant readjustment of the UK economy away from consumer spending towards exports, according to the EY ITEM Club winter forecast. But while economic growth will be better balanced it is also likely to be slower.  

The respected economic forecaster says that the impact of sterling in increasing import costs will see inflation rise to 3.1% by the final quarter of 2017, before easing back to 2% by the end of 2018. This is expected to have a knock on impact on consumer spending, as growth in disposable incomes is eroded. However, the weak pound and a softer domestic market are likely to encourage higher levels of UK exports, as businesses seek income opportunities overseas, resulting in exports increasing by 3.3% this year and 5.2% in 2018.

According to the report, this rebalancing of economic activity will be accompanied by three years of relatively slow growth. The EY ITEM Club expects GDP growth to reach 1.3% in 2017 (up from the 0.8% it predicted in October’s forecast, but down from an expected 2% in 2016) and just 1% in 2018. The Bank of England is predicted to hold interest rates at their current 0.25% until the spring of 2018.

Peter Spencer, chief economic advisor to the EY ITEM Club, comments: “We now expect the impact of Brexit on the UK economy to be shallower, but more prolonged than we did in October. However, there is a sea change coming over the next three years. The fall in the pound will force the economy to be less reliant on consumer spending, leaving growth heavily dependent upon trade performance.”

Mark Gregory, EY Chief Economist, adds: “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.”