Brexit fuels worst growth predications for UK economy for a decade.

Amid growing concerns that Britain may crash out of Europe with a no-deal Brexit, a group of economists, the EY item Club, (EY) warned that the UK economy is heading for its worst year for nearly 10 years.

The EY Item Club are the only non-government forecasting group of economists who use the Treasury modelling of the economy. They say they are independent of any political, economic or business bias.

EY say that after figures revealed zero growth in August it had downgraded its growth forecast for this year and next.  It says this is a consequence of the increasing likelihood that Britain may crash out of the EU in 6 month’s time.

They also say that the UK can expect low economic growth for the next three years. A no-deal Brexit could dent growth even further.

It forecast growth of 1.3% for the whole of 2018, down from a previous estimate of 1.4%. This would be the worst annual period for growth since the financial crisis. It also downgraded the outlook for the second quarter running.

If there was to be a smooth Brexit deal then their forecast shows a modest recovery next year with a growth of 1.5%. This is down from its previous estimate of 1.6%.

Brexit no-deal could lead to “Dire consequences.”

The International Monetary Fund (IMF), warned recently of the “dire consequences” for growth without a smooth Brexit deal.  Economists say failure to reach such a deal could significantly harm the UK economy

The Office for Budget Responsibility(OBR), the government’s economic forecaster raised the prospect, last week, of a no deal scenario triggering border delays. Companies and consumers stockpiling food and other supplies, and aircraft being unable to fly in and out of Britain.

The EY Item Club have said that uncertainties were influencing business investment decisions.  Adding, that efforts to find alternative suppliers in the UK rather than the EU may lead to an increase in spending.

It also said, the impact of import tariffs from the US had already begun to drag on economic activity within the Eurozone. Sapping appetite for exports.

Higher inflation limiting consumer spending.

Inflation is also remaining stubbornly higher than predicted. According to the Bank of England, (BoE) inflation is forecast to fall from about 2.7% to 2.3% by the end of the year. Above the Bank’s target rate.

Although the recent hot weather helped consumer spending In August, the overall growth in consumer spending going forward is estimated to remain limited.   Households in the UK are still struggling with high prices as a result of higher inflation. Incomes are also under strain as wage growth remains weak.

Howard Archer, the chief economic adviser to the Item Club, said: –

“Heightened uncertainties in the run-up to and the aftermath of the UK’s exit could fuel business and consumer caution. This is a significant factor leading us to trim our GDP forecasts for 2018 and 2019.”

“Should the UK leave the EU in March 2019 without any deal, the near-term growth outlook could be significantly weaker.”

Interest rates not expected to rise until August 2019.

The EY Item club had predicted that this year would see two interest rate rises from the Bank of England. Many economists predicted there would be a rise in May and another in August.

However, the Bank’s Monetary Policy Committee, (MPC) voted to hold off any rise in May as inflation figures remained above the Bank’s target figures.

Following, the Bank of England’s decision to raise rates in August from 0.5% to 0.75%, the forecaster said it did not now expect another increase until August next year, with two more rate rises likely in 2020.

“The EY Item Club suspects that the Bank of England will want to see sustained evidence that the UK economy is holding up relatively well after Brexit occurs in late March, before hiking interest rates.”

Businesses should test their “robustness” in preparation for all Brexit scenarios.

EY chief economist Mark Gregory said:

“The UK economy is going to experience a period of low economic growth for at least the next three years. Businesses need to recognise this and adjust accordingly.”

“They should also consider a sharp downside to the economy in the event of a no-deal Brexit. [And] make preparations for such a scenario.”

Mr Gregory said a “prudent approach” would be for firms to test the robustness of their businesses. Especially cash flow, against a short period of severe disruption, followed by a downturn for three or four quarters.

“Even if the Brexit process goes smoothly, the cyclical risks to the UK economy mean this would still be a worthwhile exercise. Now is the time to start to think about the future shape of any UK business after 2020.” he added.

Business group says “UK economy is stuck in a rut.”

According to one group representing British businesses, the British Chamber of Commerce, (BCC). “The UK economy is stuck in a rut.”  They cite uncertainly over Brexit and weaker confidence.

In a recent survey the group found that the UK services sector which accounts for nearly 4 fifths, 76% of the UK economy’s GDP had “given up” hiring staff.

It also said that the UK manufacturing industry had seen exports slow.

BCC director general Adam Marshall said:

 “We are stuck in limbo while Brexit negotiations rumble on.”

In its third quarter economic survey of 5,600 firms. –  The BCC found that the percentage of services companies attempting to recruit new staff had fallen to its lowest for 25 years.

It said of those firms who did try to find new staff, 72% reported difficulties.

Dr Marshall said:

 “Many firms are deeply invested in developing home-grown skills and talent within their own communities. However, this alone is not enough to fill the skills gaps at all levels that businesses face right now and which are set to get worse post-March 2019.”

Uncertainty over Brexit “starting to bite.”

The percentage of manufacturing firms reporting a rise in export sales and orders fell to its lowest level in the fourth quarter of 2016.

Meanwhile, uncertainty over future trading conditions is constraining investment in both the manufacturing and services sectors, the BCC said.

The balance of services and manufacturing firms that looked to invest in either plant and machinery or training in recent months fell to the lowest level in more than a year.

Suren Thiru, head of economics at the BCC, said: –

“These results suggest that the current period of below average GDP growth continued into the third quarter of 2018.”

He said that while activity in the services sector had “slackened” between July and September, it is likely to be the driver of growth in the third quarter.

However, he said that the manufacturing sector “remains a weak spot for the UK economy”, because of slowing exports activity.

Dr Marshall said: –

 “These figures reinforce what we are hearing from businesses up and down the country. The uncertainty over Brexit and the lack of bold moves to boost business at home are starting to bite.”

The BCC is calling on the government to use the forthcoming Budget on Monday 29 October to bolster business investment and productivity “in the face of significant Brexit headwinds”.

What the government said.

A government spokesperson said:

 “Our economy has grown every year since 2010, unemployment is at a 40-year low. [And] the UK is one of the best places in the world to do business.”

“But we are not complacent. [And] through the modern Industrial Strategy we are investing in skills, research and infrastructure as we build an economy fit for the future.”

A European view on Brexit.

In Europe, the former head of the European Bank told the BBC that the economic impact for the UK on leaving the EU will be greater than the impact on the European union.

He said the break up was “totally contrary to the new world” of large emerging economies, with single currencies and single markets.

The EU’s economy is worth about £13tn, compared to the UK’s £2tn.

He said:  – “If I take the EU as a whole and compare the GDP of the EU to the GDP of the UK, you see there’s a small portion which is the UK.”

He added: “It’s normal that the European 27 are less impacted themselves than the UK by this event. [Which] has been entirely decided upon by the UK – when all the 27 wanted the UK to stay.”

Mr Trichet suggested Brexit will also be detrimental to the EU at a time of economic growth elsewhere in the world. Arguing that it should be avoided “for the sake of the UK in the very long run, and for the sake of our continent”.

“It is totally contrary to the new world.”

“In a period when India, China, Brazil, Mexico, Indonesia, and all emerging economies are growing very fast and are dwarfing Europe more and more, how can it be that we decide to separate ourselves, to split? It is totally contrary to the new world.”

“How many single markets with a single currency will we have which will be enormous in 10 or 20 years’ time? Look at India, look at China, look at all those emerging countries.”

“I am a little bit passionate because I think that there’s something which goes against what would be a good strategy for all Europeans.”

“We see financial leverage continuing at a pace which is not sustainable. We should, at the level of the international community, be much more aware of the fact this global financial leverage is dangerous. [And] could be one of the causes – not the only one – of the next crisis.”

He added: –

“If we had a new crisis nobody would forgive the international community for not having taken the appropriate steps to avoid it.”

The EU is the UK’s biggest trading partner. Accounting for nearly half of all exports in 2016, according to official figures.

Mr Trichet ran the European Central Bank from 2003 to 2011. Overseeing its response to the 2008 crash and the Greek debt crisis. What concerns him now is rising public and private debt levels around the world.

Debt- Worrying numbers of householders are “in too deep with their borrowing.”

Ramsey Lomax  – Debt Help and Advice.