In its first economic forecast since the EU referendum, the British Chambers of Commerce (BCC) has today downgraded its UK GDP growth forecast, from 2.2% to 1.8% in 2016, from 2.3% to 1.0% in 2017, and from 2.4% to 1.8% in 2018.
Weaker consumer spending and a large fall in investment were the main reasons for the leading business group’s downgrading of its growth forecasts. The uncertainty surrounding the UK’s long-term political arrangements with the EU, as well as the timeline over which any actions will take place, are expected to dampen growth prospects towards the end of 2016 and over 2017. Despite these issues, the UK is expected to skirt with, but avoid, recession. The post-referendum slide in sterling is expected to help improve the UK’s net trade position.
The downgrades to the BCC’s forecast for UK GDP growth imply that the UK economy will be £43.8 billion smaller at the end of the forecast period than previously predicted.
Key points in the forecast:
• UK GDP growth forecasts downgraded: to 1.8% for 2016, to 1.0% for 2017, and to 1.8% 2018.
• GDP growth is expected to slow sharply in the short-term – quarter-on-quarter growth in Q3 and Q4 2016 is forecast to slow down to 0.1%.
• If the GDP growth forecast for 2017 is realised it would be the weakest rate of growth since 2009.
• Weaker consumer spending and a large fall in investment is expected to be only partly offset by a stronger contribution from net trade.
• Business investment is expected to fall by 2.2% in 2016 and by 3.4% in 2017. The slight pick-up in business investment in 2018 (+2.0%) reflects a ‘levelling-off’ from the declines recorded in 2016 and 2017. This compares to our previous forecast of a 4.5% increase in 2016 and rises of 7.4% in 2017 and 2018.
• Export growth is expected to drop to 2.3% in 2016, from 4.8% in 2015, but grow slowly to 3% in 2017 and 4% in 2018.
• Services and consumer spending will remain the key growth drivers of the UK economy through the forecast period.
• Employment growth is expected to slow in 2017, as uncertainty weighs on recruitment intentions.
• A further cut in interest rates is expected by the end of the year.
Dr Adam Marshall, Acting Director General of the British Chambers of Commerce, said:
“Although individual businesses continue to report strong trading conditions, the overall picture suggests a sharp slowdown in UK growth lies ahead.
“Our forecast suggests that the UK is likely to avoid a recession, but with the health warning that businesses are still digesting the result of June’s EU referendum and the challenges and opportunities to come.
“The value of sterling, the shape of future trade relationships, the status of EU nationals in the UK workforce and other factors will all influence business confidence over the coming quarters.
“Stability, clarity and action must continue to be the watchwords for government. Aside from a clear timetable for negotiations with the EU, ministers must act to support business investment and confidence.
“They should start with the long list of business-boosting infrastructure projects that have been put on hold for far too long – including a firm decision on a new airport runway, new nuclear investment, and road and rail schemes.
“We also need to see policies to encourage business investment, such as revisions to our outdated business rates system, which penalises companies for investment in plant and machinery, and hits firms before they have even turned over a penny.”
Suren Thiru, BCC Head of Economics, said:
“The downgrades to our growth forecast confirm that the UK economy is set to enter a turbulent period, with growth expected to weaken materially in the near term.
“Mounting uncertainty is likely to put a brake on investment, while rising inflation and moderately weaker labour market conditions are expected to stifle consumer spending. On the upside, the UK’s net trade position is expected to be boosted by the post-referendum slide in the value of sterling.
“Despite the likely improvement in the UK’s trade position, the significant imbalances currently facing the UK economy are expected to persist through the forecast period, with a continued over-reliance on services and consumer spending as key determinants of UK economic growth.
“While the longer-term outlook for the UK economy is highly uncertain the risks are on balance tilted to the downside, with the deep-rooted structural issues, such the size of the UK’s current account deficit, leaving the UK increasingly exposed to economic shocks.”