Think-tank warns of spending squeeze woe for UK economy

Britain's economy will struggle this year and next as consumer spending is squeezed by rising inflation and muted earnings growth, an influential think-tank will warn this week.

The EY Item Club is downgrading its UK GDP prediction. Picture: John Devlin

However, the latest economic forecast from the EY Item Club will also note that the UK’s medium-term outlook is looking stronger than it did three months ago, with the general election result increasing the likelihood of a more business-friendly Brexit.

The forecasting group, which uses the Treasury’s own model of the UK economy, is downgrading its UK GDP prediction for this year to 1.5 per cent, against the 1.8 per cent it was flagging in its April report, but is more confident about growth prospects for 2019 and 2020, upgrading both its estimates.

Peter Spencer, chief economic adviser to the EY Item Club, will say this week: “Although the general election has clouded the issue, it should result in a softer Brexit, meaning a transition arrangement, leading to a comprehensive free trade agreement further down the time-line. The outlook for this year has deteriorated since our spring forecast, but a softer Brexit should improve the medium term outlook – especially in sectors like the motor industry where investment has been held back by Brexit uncertainty.”

Inflation is expected to reach 3.2-3.3 per cent this autumn, average 2.4 per cent in 2018, before falling back.