The UK economy will have to weather a short, sharp shock, with Brexit uncertainty holding back both business investment and consumer spending, according to a leading economic forecasting group.
As forecasters cut growth expectations, a survey of finance chiefs showed caution increasing since the referendum, and retailers reported fewer shoppers on the high street than a year ago.
Severe dents to confidence mean the post-referendum economy is on “a very different path” from three months ago, said the EY Item Club, a forecasting group that uses Treasury modelling. It has slashed its predictions of economic growth for the next few years.
In April, Item said the UK’s GDP would grow by 2.6% in 2017 – a figure it now expects to be barely 0.4%. It expects the pound to have fallen 15% in a year by the end of 2016, and decline further through the decade.
Consolation for borrowers may come from marginally lower interest rates in the short term, while a severely weakened pound will help exports – although not enough to prevent a significant deterioration in the UK’s prospects.
Peter Spencer, chief economic adviser at Item, said: “Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy, compared with the trend that seemed possible prior to the vote.”
Steve Varley, chairman of EY UK, said the next two years would be “undoubtedly challenging”. He added: “The UK government will need to quickly introduce measures to help offset Brexit blues, support the economy and continue to attract foreign investment.
“The focus now needs to be on making sure that the UK negotiates the right trade deals that will allow access to key markets.”
Unemployment is forecast to rise from 5% to 7.1% by the end of 2019, cutting household disposable income. Consumer spending is expected to fall next year – the first decline since 2011.
Spencer said: “Worries about jobs are likely to see shoppers hold back on big ticket purchases, such as cars and housing-related spending. At the same time, higher inflation off the back of sterling’s weakness will squeeze growth in real incomes.”
Meanwhile, the sole member of the Bank of England’s Monetary Policy Committee (MPC) to vote to cut interest rates last week, as the bank held the rate constant, yesterday said inflation expections beyond the next few years had fallen since the referendum from an already low base.
Gertjan Vlieghe, writing in the Financial Times to outline why he voted for an immediate cut, said: “It was clear enough to me already that we would not return inflation to [the Bank’s] target sustainably without further monetary policy action.” As well as a rate cut, he has argued for further stimulus from the Bank.
Meanwhile, a survey of 132 chief financial officers at major UK companies showed that business optimism had declined to the point where most were gloomier about their firm’s prospects now than during the height of the financial crisis.
According to the poll by Deloitte, more than four out of five CFOs expect to cut hiring and discretionary spending in the next year.
David Sproul, senior partner and chief executive of Deloitte, said: “The outcome of the EU referendum has triggered a sharp, negative response from the corporate sector.”
While the speedy appointment of Theresa May as prime minister had reduced uncertainty, he said a vision for the UK’s future relationship with the EU should be set out for further stability and reassurance.
Elsewhere, retailers reported a drop in shoppers on the high street in the week after the referendum, compared with the same period last year.
While footfall figures for high streets, shopping centres and retail parks have been up in the first week of June, they finished the month 2.8% lower than the same period last year. This is the deepest decline since February 2014.
Poor weather may have played a part, said Helen Dickinson, chief executive of the British Retail Consortium. She added: “June has [also] seen many distractions, from Euro 2016 to Wimbledon, so heading out to the shops seems to have slipped down the priority list for many.”
Dickinson said retailers should redouble efforts in the coming months and, adding: “The EU referendum will not have changed the in-store experience for customers and, crucially, the price of goods on the shelves.”
Although slightly more shoppers were out in the days after the referendum than before, the last week of each month normally sees a surge in spending at a time when many people get their pay packets. Data from Barclaycard released last week showed discretionary spending in pubs and restaurants fell back from 24 June.
This article was written by Gwyn Topham, for theguardian.com on Monday 18th July 2016 00.02 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010