UK economy to slow amid Brexit and spending squeeze

The OECD expects household spending to ease amid rising inflation. Picture: Ian Georgeson

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The UK economy will slow in the coming years as Brexit uncertainty hampers growth and consumers endure a spending squeeze caused by higher prices and lower wages, according to the Organisation for Economic Co-operation & Development (OECD).

The OECD stood by its economic forecasts for UK gross domestic product (GDP), predicting it to slow from 1.8 per cent to 1.6 per cent for 2017, before dropping to 1 per cent in 2018.

It also warned that weaker growth could drive the unemployment rate above 5 per cent.

Weaker growth could push the unemployment rate above 5%, the OECD warned. Picture: John Devlin

But while the OECD expects household consumption to ease, it said consumers would also use money normally earmarked for savings to keep spending in the face of higher inflation.

In its economic outlook, the OECD said: “Private consumption growth is projected to slow, as higher inflation holds back real earnings, but a weaker growth outlook should mitigate the extent of price pressures in the economy.

“Also, households are expected to continue to support their consumption by further reducing their saving rate. Business investment is projected to contract amid the large uncertainty and because of lower corporate margins. Weaker growth could push the unemployment rate above 5 per cent.”

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Focusing on global growth, the OECD said the world economy was on course for a “modest pick up”, with global GDP expected to reach 3.5 per cent for this year and 3.6 per cent in 2018.

It said Britain’s exit from the European Union remained the “major risk” for the UK economy, with the impact of the divorce hinging on whether the UK manages to keep its strong trade links with the EU.

However, it added that the Brexit-hit pound was helping the nation’s overseas trade and backed exports to boost growth thanks to “improved competitiveness”.

Official figures last month showed the UK economy suffered an even deeper slowdown at the start of the year, as the services sector came under pressure and inflation dealt a blow to household spending.

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The Office for National Statistics (ONS) said GDP grew by 0.2 per cent in the first quarter of 2017, revising down the figure from its initial estimate of 0.3 per cent.

Sterling’s slump since the Brexit vote has bumped up the cost of living as manufacturers and retailers pass down rising import prices to consumers.

Inflation hit its highest level in nearly four years in April at 2.7 per cent, as the Brexit-hit pound, electricity price hikes and rising air fares tightened the squeeze on household spending.

The Bank of England said last month that its expects inflation to peak at 3 per cent later this year.

The UK jobless total fell by 53,000 to 1.54 million in the quarter to March, a rate of 4.6 per cent, the lowest since summer 1975, according to ONS figures published last month.

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Official figures showed overseas firms completed 40 deals to buy or merge with UK firms worth £5.1 billion in the first quarter – a fraction of the £50.4bn seen a year earlier.

The ONS said the number of deals between UK firms also dropped sharply between January and March, almost halving to 48 from 93 a year earlier and down from 90 in the previous quarter.

There were just 26 acquisitions of foreign companies by UK firms, worth £1.9bn, which was the lowest value recorded for more than three years.

It comes amid Brexit uncertainty, which is seeing many companies put investment decisions on hold, and follows the pound’s slump since the EU referendum.

Rob Donaldson, head of corporate finance at RSM, the accountancy firm, said: “We’ve seen a slowdown in domestic M&A activity in the first quarter of the year which may reflect a sense of unease about the future of the UK economy and the uncertainty resulting from Brexit.

“Despite the fall in the pound which has led to some high profile attempts by foreign companies to snap up UK firms, domestic and overseas buyers are proceeding with caution.”

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