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Brexit will start to hit UK growth 'within two years'

By Andrew Woodcock

UK economic growth will slow over the coming two years as the impact of the Brexit vote is felt, the European Commission has predicted.

But the commission upgraded its UK growth forecast for 2017 from 1% in the autumn to 1.5% now - still well below the 2.1% prediction from this time last year, before the referendum vote.

Growth can be expected to slow further to 1.2% in 2018, as the rest of the EU overtakes the UK with projected GDP growth of 1.8% in both 2017 and 2018, said the Commission in its Winter Economic Forecast.

The report warned that the impact of the vote to leave the EU "has yet to be felt" and forecast that the "brisk" UK GDP growth of 2% last year will "moderate in 2017 and weaken further in 2018".

Economic Commissioner Pierre Moscovici told a Brussels press conference: "The UK's vote to leave the EU continues to pose a significant downside risk, to the UK first and to a lesser extent the overall European economy."

The Economic Forecast named Brexit as one of a series of factors creating an "extraordinarily high level" of economic uncertainty, alongside the upcoming elections in key EU states including France, the possibility of protectionist trade policies in the US under Donald Trump and a "mounting backlash against globalisation" around the world.

But it said that global GDP growth is thought to have hit its low point last year and will strengthen this year and next, with growth outside the EU projected to pick up gradually from 3.2% in 2016 to 3.7% in 2017 and 3.9% in 2018.

The report forecast falling business investment and rising inflation in the UK over the period, while growth in disposable incomes and household consumption is expected to weaken.

But it predicted that UK exports will grow thanks to the decline in the value of sterling following the Brexit vote.

Growth in the UK has been "unbalanced" since last year's referendum, with healthy figures largely driven by consumers cutting back on saving in order to spend, said the report.

Private consumption growth is expected to be scaled back over the course of this year, as wages fail to keep pace with UK inflation, which is forecast to rise "rapidly and significantly" to 2.5% in 2017 and 2.6% next year.

And business investment is predicted to slow throughout 2017 as "rising uncertainty deters businesses from investing at recent rates".

The report warned: "Given the lag between decisions to invest and actual investment, the impact of the result of the EU referendum is expected to become apparent later in 2017."

Mr Moscovici said: "The European economy has proven resilient to the numerous shocks it has experienced over the past year. Growth is holding up and unemployment and deficits are heading lower.

"Yet with uncertainty at such high levels, it's more important than ever that we use all policy tools to support growth.

"Above all, we must ensure that its benefits are felt in all parts of the euro area and all segments of society."

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