The UK has the overall ingredients needed to achieve a stronger rate of economic growth in 2019 (1.5%) and 2020 (1.7%) compared to 2018 (1.4%), but this is strongly dependent on the UK leaving the EU with a withdrawal deal on March 29, according to the EY ITEM Club’s Winter Forecast.
However, in the event of the UK leaving the EU without a deal, the EY ITEM Club forecasts growth of just 0.7% in 2019 and 0.6% in 2020 with the very real possibility of the economy suffering stagnation or a mild recession over the second half of 2019.
If the UK is able to agree a Brexit deal with the EU, the EY ITEM Club forecasts that growth this year will be driven by domestic demand supported by a gradual improvement in consumer purchasing power, as well as a boost to business investment as the economic outlook becomes clearer.
Economic stagnation in event of ‘no-deal’ Brexit
Howard Archer, chief economic advisor to the EY ITEM Club, commented: “With the lack of clarity around the direction that Brexit will go, forecasting the UK economy at the moment is like trying to look through a thick fog. The UK economy performed broadly in line with expectations over 2018, but we are now facing a much more uncertain environment.
“We’ve based our central forecast on the assumption that the UK ultimately secures a deal to leave the EU in late-March. In a “no-deal” Brexit scenario there would be major uncertainty and a negative impact on business sentiment and investment, as well as consumer spending. However, it should be remembered that consumer spending proved resilient in the aftermath of the June 2016 referendum vote. Trade will also be affected as trade barriers, both tariff and non-tariff, are implemented. But, with both exports and imports suffering, the net effect on GDP growth from this source would be ambiguous.”
Archer added that, in the event of a no-deal Brexit, a likely sharp drop in sterling would help UK exporters, but it would also push up businesses’ costs and consumer price inflation thereby weighing on households’ purchasing power. Policymakers could look to support the UK economy in this scenario by easing both fiscal and monetary policy.
In the event of Brexit being delayed, EY ITEM Club anticipates slower economic growth due to prolonged uncertainty.
Business investment to be subdued in first half of 2019
The EY ITEM Club anticipates business investment to be subdued in the first half of 2019 amid Brexit uncertainties, but it is expected to improve later in the year. However, negotiations over the UK’s longer-term relationship with the EU are likely to remain challenging and uncertain, which could limit the upside for business investment. Nevertheless, the EY ITEM Club expects business investment to be lifted by some companies looking to invest more in automation to make up for labour shortages and to try to boost productivity.
The EY ITEM Club says it is likely that net trade will be hampered in 2019 as global growth slows. The pound is also expected to firm modestly after March as it is supported by the UK’s Brexit transition arrangement.
Richard Baker, managing partner at EY in the Thames Valley & South, commented: “The EY ITEM Club’s ‘no-deal’ forecast highlights the potential magnitude of the economic impact that this scenario would bring across the whole of the UK. While we would expect a government policy response to seek to mitigate this, a prudent approach to risk management for companies would be to stress test their business, and especially their cash flow, against a short period of severe disruption, followed by a period of low or flat growth.
“However, it’s important to bear in mind that Brexit is not the only factor reshaping the business environment. Technological change, changes in attitudes to globalisation and shifts in consumer behaviour could all have a more profound impact than Brexit. Businesses must not hide behind a Brexit ‘wall’, it is important for organisations to look forward and prepare for the long-term.”