UK growth set to ‘slow down sharply’

UK GROWTH will slow down sharply next year amid political uncertainty at home and abroad, a leading business group has predicted.

The report comes just days after economist Andy Haldane signalled that interest rates were unlikely to rise until next summer. Picture: Neil Hanna

The EY ITEM Club’s autumn forecast said gross domestic product (GDP) would grow by 3.1% this year but only 2.4% in 2015, much lower than expectations by the Bank of England, the CBI or International Monetary Fund (IMF).

It comes just days after the Bank’s chief economist Andy Haldane signalled that interest rates were unlikely to rise until next summer amid the gloomier outlook for the economy.

The report also follows a turbulent week on world markets, which has seen the FTSE 100 Index fall to levels not seen since June last year amid growing worries about the health of the global economy.

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 UK growth.

It points to anxiety in Britain over the coming general election as well as constitutional reforms - with a new settlement for Scotland expected in the wake of the independence referendum - and an EU in-out vote looming in 2017.

The report also highlights risks from overseas, in particular the Ukraine crisis, which have dented confidence in the UK’s key European markets.

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.”

Mr Spencer 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 said the weakness of wage growth and commodity prices - which both ease inflationary pressures - meant the Bank of England was 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%, would average just 1.3% in 2015.

Meanwhile the stalling recovery in Europe and the fall in the euro against the pound are adding to the problems faced by UK exporters, it said.

“The UK’s export outlook continues to look dreadful. The glimpse of economic rebalancing that we saw in the early part of this year has turned out to be a false dawn.

“Manufacturing data is weak and it looks unlikely that net trade will make any positive contribution to GDP growth before 2017. However, at least the domestic economy is in a better position than before to help the UK ride out the storm.”

The report’s forecasts for growth are lower than expectations from the Bank of England, which has pencilled in 3.5% for this year and 3% for next, as well as the IMF (3.2% and 2.7%) and the CBI (3% and 2.7%).