LONDON: The UK needs to prepare itself for weaker economic performance, two major forecasting groups have said, in the latest studies predicting the downsides of the Brexit vote. Fragile business sentiment linked to Brexit-related anxiety, domestic political uncertainty and squeezed consumer budgets have caused UK business confidence to drop to its lowest point for almost six years, the economic consultancy IHS Markit reports.
Meanwhile, Britain’s economic growth will continue to weaken this year due to a Brexit-related consumer-spending squeeze and muted earnings growth, the EY Item Club said in the latest downgrading of its forecasts. Chris Williamson, chief economist at IHS Markit, said: “Companies have become increasingly worried about the business outlook, largely as a result of heightened political uncertainties and the potential impact of Brexit.” He added: “Business optimism about future prospects has sunk to its lowest for nearly six years, adding to a growing body of data which points to a slowing economy. “The drop in confidence pushed the level of UK optimism below that seen in the eurozone for the first time in seven years, and contrasts with multi-year high levels of optimism in the United States and Japan. As such, the survey results suggest the UK is at risk of falling behind in an otherwise solid-looking global economic outlook.” In a report published on Monday, IHS Markit said the “net balance” of UK firms expecting a rise in business activity over the next 12 months stood at +35% in June, markedly down from +52% in February and the lowest reading since October 2011. However, the headline figure masks vastly different views of the world depending on the respondents’ business sector. The service sector recorded a score of +32%, while more upbeat manufacturing firms, who are hoping for gains in new export markets, scored a balance of +49%.
Meanwhile, the EY Item Club nudged down its forecast of GDP growth from 1.8% to 1.5% in 2017. Peter Spencer, the group’s chief economic adviser, said: “The outlook for this year has deteriorated since our spring forecast.” He said consumer spending, the economy’s main engine of growth, would continue to lose momentum as the pound’s collapse since the Brexit vote continued to stoke inflation. “The inflationary squeeze on consumers has been painful and shows little sign of easing any time soon,” he said. Sterling’s sharp drop is yet to fully feed through to the consumer price index, with inflation expected to reach up to 3.3% this autumn – well ahead of the growth in average earnings. Real household disposable income is forecast to fall by 0.2% in 2017, before recovering by 1.1% next year, while with the household saving ratio at a record low of 1.7% in the first quarter of 2017, consumers will have limited scope to mitigate the impact.