Britain’s economy could suffer a “huge uncertainty shock” if next year’s general election delivers a hung parliament, a leading economic forecaster warns.
The prospect of no clear winner when Britain heads to the polling booths in May is already pushing down next year’s growth and business investment predictions, according to the EY Item Club’s autumn forecast. It also cites the weakening eurozone economy and geopolitical tensions, including the Ukraine crisis, as threats that are making businesses nervous.
The Item Club predicts that business investment growth will slow sharply next year, from 9% in 2014 to 5.8% in 2015. That will hamper economic growth, tipped to fall from 3.1% this year to 2.4% in 2015.
The warning comes as new economic data are due that will probably show the British recovery slowed down between July and September.
Peter Spencer, chief economic adviser to the EY Item Club, believes that, with polls showing next year’s election is hard to call, the uncertainty and nervousness in the financial markets around the election will be much greater than in 2010.
“This makes it very difficult for anyone engaged in business planning to manage a company through this uncertainty,” he said. “I don’t think we would have had this conversation in 1997. The gulf between the parties this time is enormous.”
Businesses are also worried by the prospect of a referendum over Britain’s membership of the European Union, Spencer said.
“The comparative advantage we offer foreign investors is dependent on the fact we are a haven of political stability, and our proximity to Europe. If both of those are brought into question, what happens to the likes of Nissan and Toyota, or financial services firms in the City?”
Spencer pointed out that Germany’s industrial productivity and exports had fallen sharply in August, as the Ukraine crisis and eurozone fears had risen. “A huge uncertainty shock is really hammering Germany’s economy now,” he said, illustrating the dangers facing Britain. “It is a very good example of what can happen if businesses get clutched by this sort of risk.”
The UK economy is also a long way from regaining its full potential following the financial crisis, he added.
The EY Item Club, which uses the Treasury’s model of the UK economy, flagged up that exporters are suffering from the stalling European recovery and the fall in the value of the euro.
HM Treasury agreed that the eurozone area, Britain’s largest trade partner, is a “growing risk”, saying: “We have to recognise that the UK is not immune to these problems, which is why we will continue working through the plan that is building a resilient economy.”
Data due on Friday will show how the UK economy performed in the third quarter of 2014. Economists predict that GDP increased by 0.7% in the quarter, a slowdown compared with 0.9% between April and June.
Howard Archer of IHS Global Insight said there was a risk that growth could be weaker, given “limited industrial production and the very real possibility that construction output contracted”.
The retail industry is also struggling. Footfall across UK high streets, out of town retail parks and shopping centres around the UK was down by 0.9% year-on-year in September, according to figures from Springboard, after a 1.1% fall in August.
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