Growth forecasts for the UK economy have been slashed after the Leave campaign snatched victory in the EU referendum.
Economic researcher IHS Global Insight said the vote to leave the EU was “bad news” for Britain’s short- and medium-term economic prospects, as sterling plunged to a 30-year low in the wake of the vote.
IHS said it was cutting its GDP growth forecast for this year to 1.5 per cent, down from 2 per cent previously, and slashing its prediction for 2017 growth to 0.2 per cent – that compares with an earlier prediction of 2.4 per cent. Its forecast for 2018 is cut from 2.3 per cent to 1.3 per cent.
Chief UK and European economist Howard Archer said: “Major economic and political uncertainty will be a fact of life for some considerable time, likely weighing down markedly on business and household confidence and behaviour, so dampening corporate investment, employment and consumer spending.
“Weaker asset markets and tighter credit conditions are seen further hampering UK growth, while the housing market could suffer a marked downturn.”
He added: “Over the long term, how the United Kingdom economy fares outside the European Union depends on many factors. This notably includes the extent of the trade agreements that are reached not only with the EU but also with other regions and countries; how much the UK is affected by non-trade barriers when exporting to the EU; the amount of deregulation that is undertaken in the UK; what immigration policy is followed, how the City of London’s role as a dominant financial centre is impacted; and how foreign direct investment into the UK is affected.
“It could take five to ten years for all of these matters to be sorted. In the meantime, there is a very real risk that Scotland at least could leave the United Kingdom. This would substantially aggravate political and economic instability.”
Martin Beck, senior economic advisor to the EY Iem Club, said: “The short-term economic impact is more likely to come down to the effect on confidence and expectations. Uncertainty over the UK’s future trading relationship with the EU could continue to hold back investment in some industries.
“And there is a risk that firms in sectors where an EU domicile is important for business, notably international finance, may choose to move activity out of the UK to guard against the possibility of no deal being agreed. Capital inflows from abroad may also slow, triggering a potentially painful adjustment in the UK’s current account position, particularly if the vote precipitates a period of political uncertainty.”
He added: “If a weaker pound persists, inflation is likely to spike up in a year or so. But we think the Bank of England is likely to look through a temporary rise in inflation and support the economy via a loosening of monetary policy. The scope for the Bank to cut interest rates is limited, but a rate cut or additional asset purchases in August’s monetary policy committee meeting, which will also see the publication of the Bank’s first post-referendum forecast, is plausible.”
CBI director-general Carolyn Fairbairn described the vote as a “momentous turning point” in Britain’s history, and acknowledged that many businesses would be concerned by the Leave campaign’s victory.
“But they are used to dealing with challenge and change and we should be confident they will adapt,” she said.
“The urgent priority now is to reassure the markets. We need strong and calm leadership from the government, working with the Bank of England, to shore up confidence and stability in the economy.”
Fairbairn added: “The choices we make over the coming months will affect generations to come. This is not a time for rushed decisions.
“The CBI will be consulting its members and business is committed to working with government to shape the best possible conditions for future prosperity.”
Responding to the referendum result, power supplier SSE said there was “no immediate risk” to how it serves customers, but the level of threat may increase “if the vote to leave leads to a prolonged period of uncertainty about the legislative or regulatory framework that SSE operates within”.
The Perth-based group said: “It is not yet clear how this matter will now progress, but SSE believes that the UK government should be mindful of the importance that the harmonisation of the GB energy market with the countries in Europe can have on efforts to deliver clean, secure and affordable energy.”
Ed Molyneux, chief executive and co-founder of Edinburgh-based accounting software firm FreeAgent, said the outcome of the vote was a “big blow” to the UK’s small business sector.
“The ramifications of leaving the EU are going to be huge – especially for small businesses who sell products and services worldwide, rather than just domestically,” he said.
“And we now look set for a lengthy period of uncertainty while negotiations presumably take place over the terms of the UK’s exit.”
Molyneux added: “I would therefore urge the government to be as swift as possible in providing updates about how these discussions are progressing, and give every business owners in the UK clear, up-to-date information about what the effects of Brexit will be on important issues such as trade and tax. The last thing the business sector needs is to be kept in the dark.”
Christian Arno, the chief executive of fellow Edinburgh company Lingo24 – a translation services specialist that employs the bulk of its 230-strong full-time workforce in Romania – said he was “very upset and disappointed” at the Brexit result.
But he added: “This doesn’t change our commitment to our people, the brilliance of our people, or the attractiveness of our global market opportunity. I don’t foresee any significant changes to our business strategy, but we may have to plan a little more cautiously until the fall-out from all this is clear.”