Think-tank warns economy faces ‘short, sharp shock’ after Brexit vote

Economists are poised to revise down their forecasts for gross domestic product growth for this year. Picture: TSPL
Economists are poised to revise down their forecasts for gross domestic product growth for this year. Picture: TSPL
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Britain’s economy faces a “short, sharp shock” in the wake of the Brexit vote but stronger exports should cushion the blow, a leading think-tank will say this week.

Stock markets and the pound have endured a rollercoaster ride since last month’s historic decision to exit the European Union while a raft of business surveys have pointed to waning confidence and fears over continued access to the single market.

The EY Item Club, which is the only economic forecasting group to use the Treasury’s own modelling system, is set to warn of “severe confidence effects” on both spending and business investment, resulting in “anaemic” growth for at least the next three years.

Economists are poised to revise down their forecasts for gross domestic product (GDP) growth for this year to 1.9 per cent from 2.3 per cent previously, while 2017 could see that figure tumble to just 0.4 per cent, compared with an earlier prediction of 2.6 per cent.

However, the EY Item Club is set to argue that exports could provide a “silver lining in the Brexit cloud” as firms gain a boost from the slide in sterling, which has fallen to little more than $1.30 to the pound.

The sharply lowered projections for growth from the economic think-tank come ahead of the Bank of England’s latest quarterly forecasts – scheduled for 4 August.

The central bank last week defied predictions by keeping interest rates on hold once more, but signalled action next month to boost the economy after the Brexit vote.

Minutes of the decision by the monetary policy committee (MPC) showed members voted 8-1 to leave rates at the all-time low of 0.5 per cent, where they have been since March 2009.

Investors and economists were taken by surprise, having expected the bank to cut rates to 0.25 per cent after governor Mark Carney said last month his view was that action would be taken over the summer.

One MPC member, Gertjan Vlieghe, voted for an immediate cut to 0.25 per cent amid signs that the EU referendum decision was already hitting parts of the economy.

A post-referendum snapshot of business opinion by the Fraser of Allander Institute – published on Friday – suggested that Scotland’s economy has entered a period of uncertainty that threatens investment, jobs and growth.

Just over 60 per cent of the 300-odd firms polled believe that Brexit will have a negative impact on their business. One-third said the effects would be “very negative”, while only 19 per cent said it would have a positive impact.

Duncan Whitehead, EY lead for economic advisory in Scotland, said: “The economic aftershocks following the UK vote in favour of Brexit will reverberate in Scotland – the extent of this will be difficult to quantify.”