Reading: UK growth to slow in the face of political risks at home and abroad, says EY

  • EY ITEM Club forecasts GDP growth will slow to 2.4% in 2015
  • Business investment growth expected to fall to 5.8% in 2015 in light of political uncertainty in the UK and abroad
  • But, low inflation and interest rates will sustain the economy’s expansion

Political uncertainty at home and abroad now tops the worry list and is set to dampen business investment and slow the pace of UK growth, says EY ITEM Club’s Autumn Forecast. However, falling commodity prices provide a silver lining that will support activity in the UK’s major export markets and keep inflation very low.

Uncertainty around constitutional reforms in the UK, an imminent general election and the prospect of an EU referendum in 2017 risk undermining the strides that investment made over the past year, when it made up more than half of the growth in demand. The report also points to the growing geopolitical risks, in particular those stemming from the situation in Ukraine, which has dented business confidence in the UK’s key European markets.

The EY ITEM Club’s Autumn Forecast says business investment will grow by 9% in 2014, before tempering to 5.8% in 2015. With the consumer also pausing for breath, GDP growth is predicted to slow to 2.4% in 2015, down from the 3.1% expected this year.

Peter Spencer, chief economic adviser to the EY ITEM Club, commented: “Let’s be clear, 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. Mortgage lenders and borrowers have already shown greater restraint following the ‘Mortgage Market Review’ and the prospective increase in interest rates. Given the weakness of commodity prices and wages I doubt that the MPC will be in any hurry to raise interest rates.”

Neil Hutt, EY’s senior partner in Reading, said: “The first wave of investment is now well under way, but on the ground businesses in Reading are becoming nervous. They are faced with an uncertain domestic political situation, while there are renewed concerns about their key export markets. They haven’t pulled on the reins just yet, but there is a definite sense of caution. This is a time for cool heads.”

Low inflation period to provide lifeline to UK economy
The UK has been enjoying the longest period of below target inflation since the financial crisis and EY ITEM Club says this is set to continue, providing some solace to UK consumers and supporting spending.

Falling commodity prices, driven by an economic slowdown in key commodity importing countries, will see CPI inflation averaging just 1.3% in 2015. According to the forecast this low inflationary environment will also keep interest rates on hold until at least spring 2015, if not later.

Spencer added: “Inflation is no longer hitting spending power as it was two years ago. Food prices are falling and, with oil down by about 20% since the summer, prices at the petrol pumps are coming down too. There are a lot of winds blowing inflation lower and there is even a risk that inflation could fall below 1%, which would force Mark Carney to write his first letter of explanation to the chancellor.”

Exports and trade – UK faces double whammy from the eurozone
The stalling European recovery and the devaluation of the euro at the expense of the UK pound are adding to the problems faced by UK exporters, according to the EY ITEM Club.

Spencer continued: “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 weakening 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.”