Global economy '˜will come to UK's rescue' post Brexit

A revival in the fortunes of key UK trading partners will smooth the impact of Brexit and help rebalance Britain's economy, an influential think-tank will say this week.

The EY Item Club – the only independent forecaster to use the same economic model as the UK Treasury – is poised to hike its forecasts for gross domestic product (GDP) growth amid expectations of support from a stronger global economy.

The slide in sterling since last June’s EU referendum is contributing to rising inflation, which is expected to top 3 per cent this summer. The resulting squeeze on household incomes means that growth in consumer spending is due to slow. However, the pound’s drop, along with increasing evidence of momentum in the UK’s major international trading partners, is expected to spur growth in exports, the think-tank will say.

As a result, UK GDP expansion is predicted to reach 1.8 per cent this year, according to the Item Club’s spring forecast. That would be well up on the 1.3 per cent cited in its previous economic outlook. Forecasts for next year and 2019 are also set to be revised upwards.

Experts believe that the Bank of England’s monetary policy committee will remain under pressure to hold interest rates at their current record low of 0.25 per cent until the autumn of 2018.

Peter Spencer, chief economic adviser to the Item Club, will argue that while “the starting gun for Brexit has just been fired, the UK economy has been adjusting to life outside the EU since the referendum”. He will highlight recent data that suggests that the pound’s depreciation has boosted manufacturing, although inflation has subdued retail sales growth.

But the report is also set to stress that investment in new export capacity and the UK supply chain will be necessary to extend the recent strong performance of overseas sales following Brexit in two years’ time.

Mark Gregory, EY chief economist, will say: “Investment in capacity and skills is clearly going to be critical if the UK is to succeed in a competitive global market. Business has a key role to play here but so does the government. Collaboration will be essential.”

The Item Club will caution that the outlook for both the UK and global economy remains at risk from political developments.

This week’s report comes after official figures on Friday revealed that output in Britain’s construction and manufacturing industries remained under pressure in February while the trade gap widened, pointing to a slowdown in momentum for the UK economy. The Office for National Statistics data showed construction output came in shy of expectations, falling by 1.7 per cent in February, down from a revised reading of zero per cent in January.