Economy  

Warning UK economy is treading water

Warning UK economy is treading water

The British Chambers of Commerce has downgraded its medium-term outlook for the UK economy over the next few years.

While the BCC has upgraded its UK growth forecast for 2017 from 1.5 per cent to 1.6 per cent, it expects growth for 2018 and 2019 to be less than anticipated.

According to its forecasts the British economy will grow by 1.2 per cent in 2018, down from an anticipated 1.3 per cent, and by 1.4 per cent in 2019, down from the 1.5 per cent predicted.

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While inflation is expected to peak at 3 per cent by the final quarter of 2017, the BCC said it is still likely to outpace average earnings until 2019, eroding real wages and weighing on consumer spending and therefore economic growth.

But another main reason for the downgrade in the BCC’s forecast was a weaker contribution from net trade with “little evidence” that the depreciation of the pound had boosted the UK’s exports.

Adam Marshall, director general of the BCC, said: “While some businesses report strong trading conditions, the UK economy as a whole is treading water, and there is no sign on the horizon of a return to healthier levels of growth.

“Our forecast suggests that the hoped-for rebalancing of the UK economy towards investment and export is unlikely to materialize in the medium term.

“The rising upfront cost of doing business in the UK, the uncertainty around Brexit, and the constraints created by skills gaps and shoddy infrastructure collectively outweigh any benefit arising from the recent depreciation of sterling.

“A cheaper currency does not automatically mean an export boom, no matter how some politicians and commentators will it to happen.”

The BCC predicts the rate of import growth will increase, but with little evidence that customers are switching from imported goods despite their rising cost.

This means falling real wages, and a slight weakening in labour market conditions, will see consumers rein in their spending in 2018.

The BCC’s latest forecast on interest rates is that the first increase back to 0.5 per cent will take place in the third quarter of 2018, two quarters later than previously predicted.

Suren Thiru, head of economics at the BCC, said: “It is increasingly clear that the post-EU referendum slide in the value of sterling has done more harm than good.

“Inflation is being driven by the sizable increases in the cost of imported raw materials over the past year, and is expected to remain a drag on consumer spending over the near term, with pay growth not expected to outpace price growth until 2019.

“Although there remains considerable uncertainty over UK’s growth prospects, the risks to our current outlook are to the downside.

“On Brexit, our forecast implicitly assumes a relatively smooth exit from the EU.

“A more sudden departure would be likely to trigger a far more marked weakening in economic conditions.”

damian.fantato@ft.com