Exports the ‘silver lining’ in the Brexit cloud
THE post-referendum fall in the pound should cushion the economy against some of the adverse effects of uncertainty by boosting UK exports but severe confidence effects on spending and business investment will result in anaemic GDP growth for at least the next three years.
The EY ITEM Club expects sterling’s trade-weighted value to be 15% down on the level in Q4 2015. However, this will not be enough to prevent a significant deterioration in the UK’s growth outlook, compared to the predictions made in April.
The EY ITEM Club is forecasting GDP growth of 1.9% this year (down from the 2.3% it predicted in April) and expects growth of 0.4% in 2017 (down from 2.6%) and 1.4% in 2018 (down from 2.4%).
Business investment is expected to see a larger relative hit, falling by 0.9% in 2016 and by 2% in 2017 – down from Aprils’ forecast of growth of 3.2% and 7.8% respectively.
The EY ITEM Club believes that the longer-term outlook for the economy will be determined both by domestic policies in areas like regulation and by the UK’s ability to secure trade deals with the EU and other markets.
The forecast assumes that post-2019 the UK will be able to negotiate a free trade agreement with the EU similar to the recent EU-Canada deal, which keeps trade between the UK and the EU free of tariffs.
Peter Spencer, chief economic advisor to the EY ITEM Club, said: “The economy is set to suffer a severe loss of momentum in the second half of this year. Heightened uncertainty is likely to hold back business investment, while consumer spending will be restrained by a weaker jobs market and higher inflation. Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy, compared to the trend that seemed possible prior to the vote. But amongst the gloom, the weaker pound provides one silver lining to exporters, particularly those selling to the US and emerging markets.”
Stuart Watson, Yorkshire & Humberside senior partner at EY, adds: “Undoubtedly the next couple of years will be challenging for the UK economy. The UK government will need to quickly introduce measures to help offset Brexit blues, support the economy and continue to attract foreign investment.
“While investors value the UK’s access to the single market, we shouldn’t lose sight that they also rate the UK’s quality of life, diversity and culture, education, stability of social climate, telecommunications, and labour skills highly. These underlying fundamentals have not changed.
“The focus now needs to be on making sure that the UK negotiates the right trade deals that will allow access to key markets. There are numerous opportunities for the economy to remain not only open for business but also attractive, competitive and connected. As the world’s fifth largest economy, the UK will continue to be an integral piece of the global jigsaw.”
