UK economic forecast
The EY ITEM Club has trimmed its GDP growth forecast for both 2018 and 2019 for the second successive quarter. This reflects increased uncertainties currently facing the outlook due to the elevated risk of the UK leaving the EU without a deal in March 2019, recent faltering consumer purchasing power, and a clear loss of economic momentum in the eurozone over the first half of 2018 as well as an uncertain global trade outlook.
Our latest autumn forecast expects UK GDP to grow by 1.3% in 2018 (downgraded from 1.4% and 1.6% in the EY ITEM Club’s Summer and Spring Forecasts respectively), and 1.5% in 2019 (downgraded from 1.6% and 1.7% in the EY ITEM Club’s Summer and Spring Forecasts respectively).
GDP growth improved to 0.6% quarter-on-quarter (q/q) in Q3 2018 from 0.4% q/q in Q2 2018, helped, we expect, by a very strong performance in July which benefited from the football World Cup and the heatwave. This would make Q3 2018 the best quarter for growth since Q4 2016. However, we predict growth will fall back to 0.3% q/q in Q4 2018 and through the first half of 2019.
2017, a better year than expected …
- GDP growth in 2017 was 1.8%, a better performance than had been expected at the start of the year given Brexit uncertainties and the substantially increased squeeze on consumer purchasing power.
- GDP growth was limited to 0.3% quarter over quarter (q/q) in Q1 and Q2 2017, improving gradually to 0.4% q/q in Q3 and 0.5% q/q in Q4.
- However, this was the weakest expansion since 2012 and was lower than global growth and the stronger expansion in both the Eurozone and US.
Listen to our podcasts
Podcast 1 | EY ITEM Club Autumn Forecast 2018: Fast cast: Highlights
Listen to EY’s UK Chief Economist, Mark Gregory’s, key highlights from the Autumn Forecast.
Podcast 2 | EY ITEM Club Autumn Forecast 2018: Roundup
Listen to EY’s UK Chief Economist, Mark Gregory, as he examines the findings of the Autumn Forecast and considers the implications of the many moving and conflicting forces impacting the UK economy in these unprecedented times.
- EY ITEM Club expects GDP growth of 1.3% in 2018, slightly downgraded from 1.4% in our summer forecast.
- EY ITEM Club forecasts average earnings growth to reach 2.7% in 2018 and then 3.0% in 2019, trimmed from 2.9% and 3.1% respectively in the summer forecast.
- The downgrading in expected earnings growth is mirrored in consumer spending growth as the EY ITEM Club cuts its forecasts for 2018 to 1.1% and 1.4% for 2019.
- EY ITEM Club does not expect any further interest rate rises from the Bank of England’s Monetary Policy Committee (MPC) until after the UK leaves the EU in March 2019, with one hike forecast for that year (in August) and two in 2020.
- Business caution over committing to major investment expenditure over the next few months could be partly offset by firms seeking to ‘re-shore’ supply chains from the EU to the UK to avoid potential disruption from any new trade barriers between the two parties.
- The boost to exporters’ profitability from the cheap pound appears to have spurred some capital spending, particularly amongst relatively export-orientated manufacturers. Manufacturing investment rose 9.9% y/y in Q4 2017, a 10-quarter high, albeit then slipping to 7.8% in Q1 2018 and then dipping to 1.6% in Q2 2018.
- Overall, business investment is expected to be modestly positive over the rest of 2018, helped by some companies looking to increasingly invest in automation to make up for labour shortages and to try to boost productivity.
The UK economy is going to experience a period of low economic growth for at least the next three years, and businesses need to recognise this and adjust. 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. Testing the robustness of their businesses, especially cash flow, against a short period of severe disruption followed by a downturn for three or four quarters would be a prudent approach to risk management. 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."