UK economic growth to take a hit in 2015, says EY Item Club

Posted on 20 Oct 2014 by Callum Bentley

Political uncertainty at home and abroad now tops the worry list and is set to dampen business investment and slow the pace of UK growth, says EY ITEM Club’s Autumn Forecast.

Uncertainty around constitutional reforms in the UK, an imminent general election and the prospect of an EU referendum in 2017 risk undermining the strides that investment made over the past year, when it made up more than half of the growth in demand.

The report also points to the growing geopolitical risks, in particular those stemming from the situation in the Ukraine, which have dented business confidence in the UK’s key European markets.

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The EY ITEM Club’s Autumn Forecast says business investment will grow by 9% in 2014, before tempering to 5.8% in 2015. With the consumer also pausing for breath, GDP growth is predicted to slow to 2.4% in 2015, down from the 3.1% expected this year.

Peter Spencer, chief economic advisor to the EY ITEM Club comments: “Let’s be clear, the forecast for GDP growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms. Looming political uncertainty risks denting corporate confidence, the question now is how will these risks play out?

“I expect caution to become the order of the day. Mortgage lenders and borrowers have already shown greater restraint following the Mortgage Market Review and the prospective increase in interest rates. Given the weakness of commodity prices and wages I doubt that the MPC will be in any hurry to raise interest rates.

Mark Gregory, EY’s chief economist adds: “The first wave of investment is now well under way, but on the ground businesses are becoming nervous. They are faced with an uncertain domestic political situation, while there are renewed concerns about their key export markets. They haven’t pulled on the reins just yet, but there is a definite sense of caution. This is a time for cool heads.”

Exports and trade

The stalling European recovery and the devaluation of the euro at the expense of the UK pound are adding to the problems faced by UK exporters, according to the EY ITEM Club.

Spencer continues: “The UK’s export outlook continues to look dreadful. The glimpse of economic rebalancing that we saw in the early part of this year has turned out to be a false dawn. Manufacturing data is weaking and it looks unlikely that net trade will make any positive contribution to GDP growth before 2017. However, at least the domestic economy is in a better position than before to help the UK ride out the storm.”