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Severe weather hits UK economic forecasts

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‘Stable but sluggish’ – that’s the verdict of the influential EY ITEM club for the UK economy, which shows little sign of breaking the pattern of stunted growth seen in the second half of 2017.

In its Spring forecast, the group predicts UK GDP to grow 1.6% in 2018, a downgrade from its previous estimate of 1.7%. The downgrade is largely a result of the severe weather conditions in February and March, which have weighed on economic activity.

The group foresees greater strength for consumers – with inflation set to fall and income to rise. It forecasts real (after inflation) household income growth to hit 1.2% in 2018 and 1.4% in 2019, a substantial improvement on 2017’s 0.2% rise.

For business, business investment should be supported by greater clarity over Brexit following an agreement on the transition period. However, the group said a weak end to 2017 providing a poor launch pad for growth this year. It expects business investment to expand by 1.7% in 2018 before picking up to 2.7% in 2019.

However, it added that this relative stability masked significant differences in performance across the UK economy. In particular, the retail and consumer-facing sectors have found it tough-going in recent months. The group said this was not just weather-related, and analysis of profit warnings for companies in these sectors – now at a seven-year high – showed how severe the situation had become.

This led to a clear difference between large and small cap companies. Companies that form part of the FTSE Small Cap index recorded their highest number of profit warnings since the financial crisis. There is also a notable gap between service companies and manufacturing companies. Capital spending by manufacturing companies grew by 6.7% year-on-year, while financial and business service companies have already paused UK investment.

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