Political fears dent UK economy growth

According to the study, political uncertainty both at home and abroad now tops the list of business worries. Picture: TSPL

Publishing its autumn forecast, the influential EY Item Club predicted that gross domestic product (GDP) would grow by 3.1 per cent this year but just 2.4 per cent in 2015 – a projection that trails those of the Bank of England, the CBI and the International Monetary Fund.

According to the study, political uncertainty both at home and abroad now tops the list of business worries and is set to dampen investment and slow the pace of the UK recovery.

It points to anxiety in Britain over next year’s general election as well as constitutional reforms – with a new settlement for Scotland being negotiated in the wake of the independence referendum – and a possible EU in-out vote looming in 2017.

The forecast – which comes ahead of official third-quarter GDP data this week likely to show slowing momentum – also highlights risks from overseas, in particular the Ukrainian crisis, which have dented confidence in the UK’s key European export markets.

Today’s report follows remarks by the Bank of England’s chief economist Andy Haldane on Friday, which indicated that interest rates were unlikely to rise until next summer amid the gloomier outlook for the economy. It also follows a turbulent week on world stock markets, which saw London’s benchmark FTSE 100 Index fall to levels not seen since June last year. Those City nerves are likely to be further tested this week.

Peter Spencer, chief economic adviser to the EY Item Club, said: “The forecast for GDP growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms. Looming political uncertainty risks denting corporate confidence, the question now is how will these risks play out? I expect caution to become the order of the day.”

He said mortgage lenders and borrowers were already showing restraint after the introduction of tighter home loan rules earlier this year and the threat of a hike in interest rates.

But he added that the weakness of wage growth and commodity prices – which both ease inflationary pressures – meant central bank policymakers were unlikely to be in a hurry to raise the cost of borrowing.

The report predicted inflation, currently at a five-year low of 1.2 per cent, would average just 1.3 per cent in 2015. The Item Club forecast coincides with a call by the CBI business group to target action to “revitalise” domestic supply chains.

It claims that by doing so Britain could benefit from a £30 billion injection into the economy by 2025, creating some 500,000 jobs.

Based on research carried out by AT Kearney, the global management consultancy firm, the CBI report points to underinvestment in research and development (R&D), a growing skills crisis and weakened foundation industries that are “key to advanced manufacturing” – such as plastics, metals and chemicals.

Katja Hall, CBI deputy director-general, said: “We need to see a bold strategy that breathes new life into our supply chains, and makes the UK the destination of choice for manufacturing high-value products. This could provide a £30bn boost to the economy, and create half a million extra jobs.”