A “SHALLOW and prolonged” economic impact from Brexit will see the UK economy become heavily dependent on exports as it sees a “significant readjustment” away from consumer spending following the slump in the pound since the Brexit vote, according to forecasts.
In its latest forecast, The EY Item Club said the impact of sterling in increasing import costs will lead to a 3.1 per cent rise in inflation by the final quarter of 2017, before easing back to two per cent in 2018.
This is expected to have a knock on impact on consumer spending, as growth in disposable incomes is eroded.
The EY Item (Independent Treasury Economic Model) Club is a non-governmental economic forecasting group, sponsored by accountancy giant EY, that uses the Treasury’s model of the UK economy.
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.”
A more competitive trade sector means that, net exports are expected to add 0.8 per cent 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 per cent of GDP this year to 3.7 per cent of GDP in 2018 and 2.5 per cent in 2019.
Mark Gregory, EY chief economist, 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.”
With the UK Government set to trigger Article 50 to set in motion the two year process of leaving the EU, the ability to secure trade deals both inside and outside the EU is critical to the health of the economy.
Mr Spencer said: “The fall in the pound should help boost exports in the near term. However, trade performance and growth in 2019 and beyond will depend critically upon the exit terms that can be agreed with the EU27 and other countries.”
Separately, the latest CBI/PwC Financial Services Survey has found optimism about the overall business situation fell for the fourth consecutive quarter, the longest period of declining sentiment since the global financial crisis of 2008, and the sharpest fall since December 2008.
Hugh Aitken, CBI Scotland director, said: “Whilst Brexit is a particular challenge for banks, and broader economic uncertainty is also a concern for many, firms are also looking to future opportunities."
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