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Julia Irvine 11 Sep 2017 07:29am

ICAEW fears economic winter of discontent

Despite the uncertainty engendered by the Brexit negotiations, now is the time for businesses to take a “leap of faith” and invest in the future, ICAEW believes

In its latest economic forecast, the Institute pointed out that the economic conditions for capital investment – including the boost for exporters from the weakness of the pound – continue to be positive and spending by companies now would help to drive growth.

Yet capital expenditure was stagnant in Q2 2017 and, according to the forecast, is set to fall by 1.1% next year.

“With corporate balance sheets and profitability healthy, borrowing costs low and demand from the UK’s major trading partners strong, businesses should be investing now for the future,” said ICAEW chief executive Michael Izza.

“Without this investment, growth will continue to slow, especially as we can no longer rely on consumers to keep spending at the rate they were.”

As a result, ICAEW has revised its forecast for GDP growth in 2017 downwards to 1.6% after raising it at the end of the second quarter to 1.7%.

GDP growth is likely to remain at this level in 2018 as well, which is well down on previous growth patterns. ICAEW said that if its forecast is right, the rate of growth will be 0.8% lower than the average growth figure over the past three years.

The economy does seem to be continuing its rebalancing act, with exporting opportunities slowly improving and consumer spending retracting.

This is likely to continue as businesses carry on prioritising jobs over wage inflation. The resulting squeeze on household incomes will also continue, emphasising the need for businesses to diversify and invest if they want to see growth.

Izza pointed out that consumer spending added an average 1.5% to growth from 2014-2016, but is now likely to fall by 1.1% in 2017 and 0.3% in 2018. “It is now up to businesses to support more growth.

“They need to look for opportunities in overseas markets, make efficiency savings and invest in innovation, talent, new products and services to create a longer term return.”

He also urged chancellor Philip Hammond to take advantage of the opportunity offered by the Budget this Autumn to go for major policy changes to encourage business to invest and export. Otherwise, the government is likely to face an economic “winter of discontent”.

Meanwhile, in its economic outlook, also published today, the British Chambers of Commerce has revised its UK growth forecast for 2017 up from 1.5% to 1.6%, on a par with ICAEW’s thinking. However its growth expectations for 2018 are far more gloomy. It has cut its prediction from 1.3% to 1.2%.

It has changed its mind over the 2017 forecast because of the “moderately stronger outlook for consumer spending growth in 2017”. But it predicts that inflation will outpace average earnings for the next 18 months, eroding real wages and acting as a brake on consumer spending which is a key driver of economic growth.

 

 

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