Economic growth will keep weakening in 2017, warns think tank
Britain's economic growth will continue to weaken this year amid a Brexit consumer spending squeeze and muted earnings growth, with the latest think tank downgrading its forecasts.
The influential EY Item Club nudged down its GDP growth outlook from 1.8% to just 1.5% in 2017, saying that the UK economy has deteriorated since April.
Peter Spencer, the group's chief economic adviser, said: "The outlook for this year has deteriorated since our spring forecast."
He warned the economy's main engine of growth, consumer spending, will continue to lose momentum as the pound's collapse since the Brexit vote continues to stoke inflation.
"The inflationary squeeze on consumers has been painful and shows little sign of easing any time soon," he said.
Sterling's sharp drop is yet to fully feed through to the Consumer Prices Index, with inflation expected to reach 3.2 to 3.3% this autumn - well ahead of the growth in average earnings.
Real household disposable income is forecast to fall by 0.2% in 2017, before recovering by 1.1% next year. And with the household saving ratio at a record low of 1.7% in the first quarter of 2017, consumers will have limited scope to mitigate the impact.
As such, the Item Club expects consumer spending growth to slow from a nine-year high of 2.8% in 2016 to 1.9% this year and 1.0% in 2018.
But the think tank said the pressure on consumers will eventually start to ease in the latter half of 2018, with inflation forecast to fall back to the target by the end of next year.
In addition, the medium-term outlook is now looking stronger than it did three months ago, the group said, with the general election result increasing the likelihood of a more business-friendly Brexit.
As such, GDP growth is now predicted to grow by 1.3% in 2018 and 1.8% in 2019 - up from the 1.2% and 1.5% respectively that was previously forecast.
The group believes the election result - in which Theresa May lost her majority in the House of Commons - has increased the chances of a "soft Brexit", which improves the medium-term outlook for the economy.
"Although the general election has clouded the issue, it should result in a softer Brexit, meaning a transition arrangement, leading to a comprehensive free trade agreement further down the time-line," Mr Spencer said.
He argued that this should provide greater certainty to help stimulate business investment, as well as a looser fiscal stance.
The Item Club expects business investment to be flat in 2017, followed by growth of 0.1% in 2018.
However, assuming the UK secures a transition agreement after Brexit and moves towards a free trade agreement, the group expects business investment to strengthen to 2.1% in 2019.
Growing overseas demand for British goods made cheaper by the Brexit-hit pound will also be a source of support to the UK economy.
Export volumes are forecast to increase by 3.8% this year and 3.9% in 2018, the report said.
Mr Spencer warned against complacency, however, as he said the outlook will hinge to a large extent on what deal is finally agreed with the EU.
"It goes without saying that the UK's trade performance and output growth in 2019 and beyond will depend critically upon the exit terms that can be agreed with the EU 27 and other countries," he said.
"Although the next 15 months should bring greater clarity here, it still represents a significant uncertainty, compounded by the political uncertainty following the result of the general election."