UKOct 17 2016

UK economy to grow 1.9% in 2016

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UK economy to grow 1.9% in 2016

Ernst & Young has predicted the UK economy will grow by 1.9 per cent in 2016, but the outlook for the following years is much less positive.

According to the Ernst & Young Autumn forecast, the UK economy has shown greater resilience than many economists had anticipated since the European Referendum vote.

As such, across 2016 growth in the economy of 1.9 per cent was and will be supported by strong consumer spending, up by 2.5 per cent, and very low inflation at 0.8 per cent.

However, it noted a slowdown in consumer spending will be the knock-on effect of higher inflation, and falling business investment will result in much slower growth rates over the next couple of years.

Inflation is forecast to accelerate to 2.6 per cent in 2017, before easing back to 1.8 per cent in 2018, according to the report published today (17 October).

Alongside these figures, consumer spending is expected to slow to 0.5 per cent and 0.9 per cent respectively.

Additionally, uncertainty around the UK’s future relationship with the European Union is likely to weigh on corporate confidence, knocking business investment back by more than 2 per cent in 2017, after a fall of 1.5 per cent this year.

Ernst & Young noted as the UK’s trading relationship with the European Union becomes clearer, growth in capital spending is forecast to slowly recover to 0.3 per cent in 2018.

As a result, the firm forecasts gross domestic product growth of 0.8 per cent in 2017 and 1.4 per cent in 2018.

Despite a number of factors pointing towards a negative outlook for the UK, Ernst & Young expects exports to increase by 4.5 per cent in 2017 and 5.6 per cent in 2018.

Net exports are forecast to add 0.8 per cent to gross domestic product next year, accounting for almost all of the economy’s expected growth.

Peter Spencer, chief economic adviser to the Ernst & Young 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.”

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

Mr Spencer added the plus side is that the weaker pound and access to cheaper world markets will release labour and other resources and allow the economy to gradually re-balance towards non-EU exports, particularly of branded consumer goods and financial services, to emerging markets.

“Trade performance in 2020 and beyond will depend critically upon the terms that can be agreed with the EU27 and other countries. If the UK is not going to get unfettered access to the EU market, it is vital that we get unfettered access to cheap world markets in food and manufactures.”

Mark Gregory, Ernst & Young chief economist, adds: “The economy has not fallen off a cliff since the referendum, but recent developments have led to a more downbeat assessment of the outlook. The holidays are over and businesses are now looking hard at plans and budgets. Both investment and hiring plans are likely to be squeezed in the current environment.”

ruth.gillbe@ft.com