The dive in the pound since the Brexit vote will prompt a “hard rebalancing” of the UK economy away from consumer spending and towards exports, an influential new think-tank report will say tomorrow.
But while UK economic growth will become better balanced it is also likely to be slower, the EY Item Club is set to say in its winter forecast.
Sterling is down 18 per cent against the US dollar and 12 per cent lower against the euro since the UK’s referendum decision last June to quit the European Union – currently accounting for two-fifths of our exports.
Devalued sterling makes UK exports cheaper and therefore more attractive to overseas countries, and it is anticipated that the EY Item Club will argue this is the “silver lining” in a noticeable downturn in economic growth.
It is understood the think-tank will say that UK exports are likely to increase 3.3 per cent this year and 5.2 per cent in 2018. However, the report will say this rebalancing of the UK economy away from consumer debt towards exports – desired by governments and business organisations for many years – “will be accompanied by three years of relatively slow growth”.
The Item Club, the only independent forecaster to use the same economic model as the UK Treasury, expects GDP growth to reach 1.3 per cent this year, up from the 0.8 per cent it predicted last October, but down from 2 per cent in 2016.
It forecasts GDP of just 1 per cent in 2018, while it is also expected that the forecaster will be in tandem with many City economists who believe the Bank of England will hold off from hoisting interest rates from historical lows until the spring of 2018.
Peter Spencer, chief economic advisor to the Item Club, is set to outline that he believes “the impact of Brexit on the UK economy [will] be shallower but more prolonged than we [predicted] in October”.
However, he will say there will be a “sea change” in the UK economy over the next three years, with far less reliance on consumer spending and greater dependence on our trade performance with the rest of the world.
The UK economy has held up unexpectedly well since the Brexit vote, with both manufacturing and services industries doing better than feared.
However, official figures on Friday showed that UK retail sales fell at the fastest rate in nearly five years last month, as shoppers spent less on clothing, footwear and household goods in the run-up to Christmas.
The Office for National Statistics said month-on-month retail sales fell 1.9 per cent in December, compared to a 0.1 per cent fall in November. Economists had been forecasting a drop of just 0.1 per cent.