Economy ‘facing challenges as consumer optimism weakens’

Picture: Phil Wilkinson
Picture: Phil Wilkinson
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TOUGHER challenges loom for the UK economy in the years ahead as it has to chase “harder to win” gains from rises in business investment and productivity, an influential report is set to warn tomorrow.

The EY Item Club is expected to say that the economy has benefited in the past year from a “sugar rush” for consumers as falling commodity prices pushed inflation down to zero and put money in their pockets.

However, the think-tank, the only independent forecaster to use the Treasury’s own model of the UK economy, will say that a mixture of rising inflation and a tightening fiscal policy will dent that consumer optimism.

EY Item Club’s autumn report is set to forecast that consumer spending growth is likely to decelerate from 3 per cent this year to 2.6 per cent next year, and 2.1 per cent in 2017.

Peter Spencer, chief economic advisor to the club, will say UK consumers “should continue to make hay” on the back of low inflation expected to last until the end of this year.

But it is understood the think-tank believes that from then prices will start to rebound and, mixed with the Budget squeeze taking effect in April next year, consumers will feel more challenged and spending will no longer be able to drive economic growth.

Tomorrow’s report is also expected to say that the economy will no longer be able to dep­end on the tailwind it has received from energy and commodity price falls.

The latest warnings of tougher times ahead follows more negative economic data last week.

On Friday, it was revealed that UK construction, which accounts for about 6 per cent of GDP (gross domestic product), fell 4.3 per cent in a rainy August – its sharpest rate of contraction in more two‑and‑a‑half years.

The Office for National Stat­istics also said that the deficit in Britain’s trade in goods narrowed in August, but was bigger than expected and was also set to weigh on growth.

Howard Archer, chief UK and European economist at IHS Global Insight, said the data represented a “double blow” for the UK’s third-­quarter growth prospects.

Earlier in the week, the latest survey from Markit and the Chartered Institute of Procurement and Supply (Cips) showed that growth in the UK’s dominant services sector had its weakest quarter in the three months to September in nearly two and a half years.

The sector – which includes financial services, retail, pubs, restaurants, hotels, transport and IT – accounts for about 75 per cent of GDP.

Despite the gathering clouds, including the Chinese slowdown, the EY Item Club is set to say tomorrow that the UK should still see “solid” growth over the next three years: 2.5 per cent in 2015; 2.4 per cent in 2016; and 2.3 per cent in 2017.

The think-tank will acknowledge that the risks to emerging markets and the world economy have loomed larger in the past two years, but will suggest they have been exaggerated.

It is expected to cite China, which despite its difficulties, still has healthy service industries and consumer spending, providing UK exporters with good opportunities.

EY Item Club believes that wage growth will continue to accelerate in the UK, partly due to the introduction of the National Living Wage, and will be accompanied by rising levels of business investment.

It will predict that investment, and resulting improving productivity, will help stay the Bank of England’s hand on any early interest rate rises from six‑year historic lows.

It is also expected to reiterate that it believes it will be next autumn before rates rise.