U.K. to Grow Slower Than Expected on Brexit Woes, Item Club Says

(Bloomberg) -- The U.K. is on course to grow slower than previously estimated this year, as the risk of the nation exiting the European Union without a deal rises, according to the EY Item Club.

The world’s sixth-largest economy will expand by 1.3 percent in 2018, compared with a previous forecast of 1.4 percent, the Item Club will say on Monday. The prediction for next year will be cut to 1.5 percent, from 1.6 percent earlier.

Data last week showed the U.K. economy was set for its best calendar quarter in almost two years in the three months through September, despite a weaker-than-expected performance in August. Still, Brexit remains a question mark over future growth, with Theresa May’s government yet to secure a deal with EU counterparts even as the nation’s March exit date looms.

“Should the U.K. leave the EU in March 2019 without any deal, the near-term growth outlook could be significantly weaker,” said Howard Archer, chief economic adviser to the Item Club. “Trade could be substantially affected as barriers, both tariff and non-tariff, kick in.”

Consumer’s spending power is set to increase “at a slow rate” in coming months, with inflation slowing to 2 percent by mid-2019, the ITEM Club report says. Businesses could also be less cautious in committing new investments over the next few months as they seek to “re-shore” supply chains to the U.K. from the EU to safeguard against potential trade barriers.

“The U.K. economy is going to experience a period of low economic growth for at least the next three years, and businesses need to recognize this and adjust accordingly,” said Mark Gregory, EY’s chief economist. “Even if the Brexit process goes smoothly, the cyclical risks to the U.K. economy mean this would still be a worthwhile exercise.”

©2018 Bloomberg L.P.