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Warning over economy after Brexit vote

By Ben Woods

Published 19/07/2016

UK should brace itself for a severe loss of momentum - warning
UK should brace itself for a severe loss of momentum - warning

The UK economy should brace itself for a "severe loss of momentum" following Britain's decision to exit the European Union, a think tank has warned.

EY ITEM Club has slashed its forecasts for UK economic growth from 2.3% to 1.9% this year, and from 2.6% to 0.4% in 2017, as Brexit uncertainty drives up unemployment and puts the brakes on consumer spending and business investment. It has also knocked back its forecast for GDP growth for 2018 from 2.4% to 1.4%.

The group said Britain's decision to break free of the EU would trigger "severe confidence effects on spending and business investment", which would lead to "anaemic" GDP growth for the next three years. But it expected the plunge in the value of the pound to bolster exports by 3.4% next year, with imports falling 0.3%. The move would see net exports adding 1.1% to GDP in 2017, according to the body.

Peter Spencer, chief economic adviser 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 the weaker pound provides one silver lining to exporters, particularly those selling to the US and emerging markets."

The group expects sterling's trade-weighted value to be 15% lower by the end of this year compared to the last quarter of 2015. It was also predicting unemployment to rise from 5% to 7.1% by the end of 2019, with household and real disposable income set to drop by 0.5% next year. It expected consumer spending to rise 2.2% in 2016, before falling 0.6% the year after.

Mr Spencer said: "Short term, while we still have full access to the single market, the fall in the exchange rate will provide opportunities, while the increase in inflation and unemployment will help to rebalance the economy away from consumption.

"In the longer term, if the UK does lose unfettered access to the single market, the need to offset the damage will make it vitally important for the UK government to use its new-found freedoms over areas like trade and regulation successfully."

Belfast Telegraph

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