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UK economy to enter ‘prolonged period of weaker growth’

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The UK economy has shown “greater resilience” than anticipated since the EU referendum vote, but slower growth rates are expected over the next couple of years, according to a leading forecaster.

The EY Item Club predicts a slowdown in consumer spending on the back of higher inflation and falling business investment.

This year it expects GDP growth of 1.9%, supported by strong consumer spending (up by 2.5%) and very low inflation (0.8%).

However, with inflation forecast to accelerate to 2.6% in 2017, before easing back to 1.8% in 2018, it expects consumer spending to slow to 0.5% and 0.9% respectively. At the same time, it said uncertainty around the UK’s future relationship with the EU is likely to weigh on corporate confidence, knocking business investment back by more than 2% in 2017, after a fall of 1.5% this year.

As the UK’s trading relationship with the EU becomes clearer, growth in capital spending is forecast to slowly recover to 0.3% in 2018. As a result, the Item Club forecasts GDP growth of 0.8% in 2017 and 1.4% in 2018.

Export boost – bright spot on the horizon

Although inflation is set to soar, a weak pound is expected to boost exports.

The Item Club said they should rise by 4.5% in 2017 and 5.6% in 2018, with exports adding 0.8% to GDP next year.

Peter Spencer, chief economic adviser to the EY ITEM Club, said: “So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive. Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead. As inflation returns over the winter it will squeeze household incomes and spending. The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth.”

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