U.K.’s Post-Brexit Economic Strength Deceptive, Item Club Says

  • Growth seen slowing to 0.8% in 2017 on weak domestic demand
  • Net trade to drive expansion as weak pound boosts exports

Why Post Brexit Resilience Should be Viewed with Caution

Signs the U.K. economy has been more resilient than expected since the Brexit vote may be lulling people into a false sense of security, Ernst & Young LLP’s ITEM Club will say in a report on Monday.

While output will increase 0.8 percent next year, twice the pace forecast in July, that would represent a sharp slowdown from the 1.9 percent expansion estimated for 2016, the group will say.

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Concern that Britain could lose tariff-free access to the single market, or even tumble out of the European Union without a trade agreement in place, has driven the pound to a 31-year low. The uncertainty means companies are likely to scale back investment and hiring plans, while rising prices fueled by the weaker currency hit consumer spending, ITEM Club will say.

“So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive,” Peter Spencer, chief economic adviser to the group, will say. “Sterling’s shaky performance this month provides a timely reminder that challenges lie ahead.”

With the falling pound set to provide a spur to exports, ITEM Club sees net trade accounting for almost all of the economy’s expansion next year. Growth will then pick up to 1.4 percent in 2018 as the U.K.’s future relationship with the EU becomes clearer and companies increase capital expenditure, it will say.

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