Growth forecast slashed as cash squeeze tightens

THE influential EY Item Club will tomorrow slash its forecast for economic growth amid rising fears over weakening consumer spending coupled with the squeeze on real wages.

However, the organisation is also set to raise its predictions for growth in future years because it now believes the UK will stay in the European Union for longer than anticipated in the wake of the referendum.

Item, which uses the same economic model as the Treasury, predicted in April that growth would measure 1.8 per cent this year, but it now expects it to be 1.5 per cent.

The report will say: ‘A steadily increasing squeeze on households’ spending power from rising inflation and muted earnings growth is expected to weigh down further on economic growth.’

Estimates for growth in the longer term – as far ahead as 2020 and 2021 – have been revised upwards amid hopes of a ‘softer’ Brexit.

Mark Gregory, EY chief economist, will say in the report: ‘It does appear that to get any deal through Parliament, support from other political parties – almost all of whom have advocated maintaining closer ties with the EU than the Conservative Party – will be required.

‘EY Item Club is assuming that this makes a transition arrangement more likely, during which the UK’s relationship with the EU continues much as it does at present.’

A separate survey out today from employers’ body the CBI concludes Brexit has hit business investment. Nearly half of the 357 companies surveyed said it had affected their investment intentions – with an astonishing 98 per cent of them describing negative consequences.

CBI chief economist Rain Newton-Smith said: ‘An overwhelming number of those that did report an impact said it was negative. Government must do all it can to reverse this. Today’s investments are tomorrow’s jobs.’

Weaker consumer spending limited GDP growth in the first quarter of the year to just 0.2 per cent. Since then the squeeze on real wages – income once inflation is taken into account – has worsened.

The Bank of England says wage growth will accelerate over the next two years, but not all economists are so confident.

Former Monetary Policy Committee member David Blanchflower said it is sensible to assume nominal wage growth will stay at 2 per cent, rather than the 3.75 per cent the Bank is predicting for 2019.

He insisted: ‘Real wages are not going to be positive. They’re going to be negative.’

Blanchflower pointed out that a prolonged squeeze on real wages will raise the chances of a serious economic downturn.

He added: ‘Consumption is bound to fall and once the consumer heads out of town that’s a recession.’