Export benefits of weak sterling set to continue, says major report

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 the economic growth will be better balanced but it is also likely to be slower.
 
The EY ITEM Club 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.

The report says 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 MPC 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, said: “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.”
 
Bob Ward, EY’s North West senior partner added: “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.”

The forecast says that 2017 will see a progressive slowdown in consumer spending as the engine of employment growth stalls and inflation accelerates, squeezing household incomes.
 
After increasing by 1.8% in 2015 and 1.4% last year, UK employment is forecast to rise by just 0.2% in 2017, fall by 0.2% in 2018 and remain flat in 2019.

Employment in the North West is expected to grow by just 0.5% this year, according to EY’s recent Regional & City Forecast report. 

Employment in the region is predicted to fall over the 2016-19 period, reflecting the region’s continuing reliance on the manufacturing and public sectors, with the former projected to lose a significant number of jobs.
 
The forecast also sees UK unemployment rising from 4.8% in the final quarter of last year to more than 6% by the end of 2018.

Household real disposable income is forecast to fall by 0.3% in 2017, recovering by just 0.2% the following year. Consumer spending growth is set to slow to 1.7% in 2017 and 0.4% in 2018 from 2.8% in 2016.
 
Spencer went on: “Momentum in the consumer sector does not appear to have been affected by Brexit yet. However, a weakening labour market, tepid growth in wages and rising prices on the high street will squeeze household spending in 2017, in particular on discretionary items which have been doing well over the past year.”

The UK’s future growth is critically dependent upon a strong trade performance, the report also says.

A more competitive trade sector means that net exports are expected to add 0.8% to GDP in 2018 and later years.

Along with the boost to the UK’s overseas income from sterling’s weakness, a stronger trade position means that the deficit on the current account is set to narrow from 4.5% of GDP this year to 3.7% of GDP in 2018 and 2.5% in 2019.

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