Confidence at lowest point for six years, forecasters say
The UK needs to prepare itself for a weaker economic performance, two major forecasting groups warn in the latest studies predicting the downside of Brexit.
Fragile business sentiment, political uncertainty and squeezed consumer budgets have led to business confidence falling to its lowest level for six years, the economic consultancy IHS Markit reports.
The EY Item Club, meanwhile, said economic growth will continue to weaken this year amid a Brexit consumer spending squeeze and muted earnings growth, as it downgraded 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: “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.”
IHS 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.
The services sector recorded a score of +32%, while more optimistic manufacturing companies, who are hoping for gains in new export markets, scored a balance of +49%.
The EY Item Club nudged down its forecast of GDP growth from 1.8% to 1.5% in 2017, saying that the UK economy has deteriorated since April.
Peter Spencer, the group’s chief economic adviser, said: “The outlook for this year has deteriorated since our spring forecast.” He warned that consumer spending, the economy’s main engine of growth, will continue to lose momentum as the pound’s collapse since the Brexit vote stokes 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 prices index, with inflation expected to reach 3.2-3.3% this autumn – well ahead of the growth in average earnings.
Real household disposable income is forecast to fall 0.2% this year, before recovering by 1.1% next year, while with the household saving ratio at a record low of 1.7% in the first quarter, consumers will have limited scope to mitigate the impact. EY expects consumer spending growth to slow from a nine-year high of 2.8% in 2016 to 1.9% this year and 1% in 2018.