The UK economy is on course for an even deeper slowdown as consumer spending and business investment take a hit from uncertainty surrounding the Brexit negotiations, new research has found.
Britain’s GDP is expected to drop from 1.8 per cent growth last year to 1.5 per cent in 2017 and to 1.4 per cent in 2018, according to PwC’s UK Economic Outlook.
The professional services firm has downgraded its previous prediction for 2017 when it pencilled in GDP to ease at a slower pace to 1.6 per cent.
Consumer spending has been a key driver of the UK economy, but household spending power has come under increased pressure from a double-whammy blow of higher inflation and sluggish wage growth.
John Hawksworth, PwC’s chief economist, said Brexit uncertainty would also apply the brake to business investment as firms put their capital expenditure plans on pause.
He said: “Brexit-related uncertainty may hold back business investment, but this should be partly offset by planned rises in public investment.
“Fiscal policy could also be further relaxed in the 2017 Autumn Budget to offset the ongoing real squeeze on household spending power.”
UK economic growth for the first quarter was confirmed at 0.2 per cent last month, a marked slowdown compared with the 0.7 per cent expansion seen in the final three months of 2016.
Once the cost of living is taken into account, annual total pay in real terms sank by 0.7 per cent to its lowest level since the summer of 2014 and fell 0.5 per cent excluding bonuses over the three months to May, according to the Office for National Statistics (ONS).
Inflation marched to its highest level in nearly four years at 2.9 per cent in May, with the Bank of England expecting inflation to peak at 3 per cent by the autumn.
Economists are widely expecting GDP to struggle in the second quarter of 2017, and predict momentum in the UK economy to slow in the years ahead.
The influential EY ITEM Club nudged down its GDP growth outlook from 1.8 per cent to just 1.5 per cent in 2017, saying that the UK economy has deteriorated since April.
Forecasts by the Centre for Economics and Business Research (Cebr) show that the UK economy will grow by just 1.3 per cent in 2017, a substantial downward revision from an earlier forecast of 1.7 per cent.
Despite the pessimistic outlook, Mr Hawksworth said the UK economy was not edging towards a recession.
He added: “There are still downside risks relating to Brexit, but there are also upside possibilities if negotiations go smoothly and the recent Eurozone economic recovery continues.
“We expect the UK to suffer a moderate slowdown, not a recession, but businesses should be monitoring this and making contingency plans.”