The UK economy will experience tepid growth in 2018 due to a combination of higher inflation, reduced consumer spending and a loss of momentum in the eurozone economy.
Our latest summer forecast expects UK GDP to grow by 1.4% in 2018 (the weakest performance since 2012) and 1.6% in 2019 (downgraded from 1.6% and 1.7%, respectively, in the EY ITEM Club’s Spring Forecast).
A weak first quarter, with GDP rising by 0.2% quarter-on-quarter (q/q) gave the economy a bad start to 2018. However, with a rebound in consumer activity in Q2 and a positive set of business surveys, the EY ITEM Club expects Q2 economic growth to be 0.4%.
For our full findings, download our forecast.
Executive Summary of the Report:
Cloudy for some time over the UK economy
Who would be a forecaster?
The first half of 2018 has been a difficult one for forecasters across the board. Unexpectedly harsh winter weather has been followed by an unusually warm start to summer, while at the World Cup, the England football team exceeded expectations for the first time in many years.
As the EY ITEM Club Summer Forecast demonstrates very clearly, economists are being confronted by an extremely dynamic economy with wide variations in the performance and outlook for individual sectors, which makes forecasting very challenging. And it is not just economists who are struggling to reconcile potentially conflicting information. It was very clear on my recent travels around the UK that businesses are finding it very difficult to form a clear picture of their prospects.
As the data continues to change …
EY ITEM Club now expects the UK economy to grow at 1.4% in 2018, down from its forecast of 1.6% in the spring. While there have been some positive developments in the last few months, such as a bounceback in retail sales and continued job creation, there has been little sign of an uptick in real pay levels, and higher oil and utility prices are likely to squeeze consumer spending. In addition, the relatively positive global outlook has softened a little as momentum slows and trade disputes hits sentiment.
… the outlook worsens …
Although EY ITEM Club notes that the public finances continue to improve, elsewhere in the economy they expect consumer spending, investment and trade to be challenged throughout 2018, hence the reduction in their expectations for GDP growth this year. There will be a modest but gradual improvement across the board from 2019 to 2021 with EY ITEM Club forecasting GDP growth of 1.8% in both 2020 and 2021, still below the recent trend and unlikely to provide a major boost to corporates.
… and risks remain to the downside
Not only has the outlook worsened but the risks are weighted to the downside. Brexit remains a major source of uncertainty with the potential to deliver a significant negative economic shock. Tensions over trade globally are another potential source of risk and although EY ITEM Club note the UK is relatively unexposed to a dispute between the US and China, there would be an impact from a global slowdown.
Low growth should be the base case …
It is clear to me that the base case assumption on the UK economy for business should be one established on low growth for the next three years as a minimum.
Whatever the outcome of the Brexit negotiations, the resulting adjustment is likely to act as a drag on the economy. The EY ITEM Club forecast of 1.4% growth in 2018, 1.6% in 2019 and 1.8% in 2020 and 2021 assumes that the EU and UK will sign a withdrawal agreement that will support a stable transition and hence avoid any major shock to business investment. This is probably a best-case assumption and actual growth could still be hit by lower investment.
While there was some evidence of a recovery in retail sales in the recent data, the overall consumer outlook continues to be challenging. There remain a number of risks to consumer spending such as the rate of wage growth, higher inflation if the pound falls or energy prices rise faster, alongside structural shifts that retail and consumer businesses are working to address already. For businesses in the consumer space, challenge and rigour in planning and forecasting are a must.
… and forward thinking is essential
The preceding discussion has highlighted how ensuring that businesses are positioned for a potentially challenging few years has to be their priority. However, there is also a need to start to think in detail about the future of individual businesses, given the likely changes to the UK economy. Issues to consider include:
• The potential impact of technology as a disruptor of existing business models across customer interactions, operations and supply chains.
• How the structural shift in the consumer market will play out and what this means for individual businesses. The immediate effect may be on those
businesses selling directly to consumers but over time, business-to-business activity will also be impacted. For example, owners of retail real estate will face ongoing pressure on pricing, and investment goods providers may see less demand from consumer goods manufacturers.
• As the shape of Brexit becomes clear, the implications for trading operations, labour markets and regulation will begin to emerge and will have to be factored in to strategic and operational decision-making. The recent announcements from UK retailers on job losses, restructurings, store closures and new alliances and partnerships should be seen as a call to action. This sector is first in line to face the emerging challenges but other sectors will soon find themselves facing similar pressures. Being prepared will be a major advantage when the time comes.
Compliments of EY