Jessica Fino 17 Jul 2017 12:37pm

UK economic growth hit by consumer spending squeeze

The squeeze will continue to impact economic growth in the UK this year and the next, the latest EY ITEM Club report has predicted

The Big Four firm revised its growth forecast of 1.8% to 1.5% for 2017, but said 2018 is expected to be slightly better than its forecast back in April due to the prospect of a softer Brexit.

The Summer Forecast report found that the general election result could lead to a more business-friendly Brexit, with the possibility of a transition arrangement leading to a stronger forecast for 2020 and 2021.

A transition agreement after Brexit could also lead to an increase in business investment to 2.1% in 2019, compared to 0.1% in 2018.

However, consumer spending and business investment has remained challenging as confidence has weakened since the spring, the report found, which is expected to lead to lower growth in both areas.

The EY ITEM Club said GDP growth is expected to be 1.3% in 2018 and 1.8% for 2019, an increase from the 1.2% and 1.5% respectively that was previously forecast.

Peter Spencer, chief economic advisor to the EY ITEM Club, said, “Although the general election has clouded the issue, it should result in a softer Brexit, meaning a transition arrangement, leading to a comprehensive free trade agreement further down the time-line.

“The outlook for this year has deteriorated since our spring forecast, but a softer Brexit should improve the medium term outlook - especially in sectors like the motor industry where investment has been held back by Brexit uncertainty.”

EY ITEM Club said that pressure on consumers will continue to worsen this year, but it will start easing towards the end of 2018.

Employment levels are also expected to increase by 0.9% this year, 0.1% in 2018 and 0.4% in 2019.

But real household disposable income is likely to fall by 0.2% in 2017, before recovering by 1.1% in 2018.

Meanwhile, export volumes are forecast to increase by 3.8% this year and 3.9% in 2018, while import volumes will likely increase by 3.2% and 2.8% respectively.

Mark Gregory, EY’s chief economist said, “Businesses need to pull off a difficult balancing act by managing their organisation through a difficult 12 months of stuttering UK growth, while still creating the basis to grow if the medium-term outlook improves as forecast.”

Also on Monday, Deloitte reported that the UK saw the biggest decline in consumer confidence in two years during the second quarter of this year.

Business confidence declined from -7% to -10% in Q2, driven by a drop in confidence in disposable income and the level of debt.

The Big Four firm also blamed the squeeze in living standards, with spending on essentials dropping 4% and discretionary spending down by 3%.

This was due to inflation hitting its highest level in four years and wages dropping in real terms for the first time in three years.

Deloitte said that inflation rose to 2.9% in June, the highest since June 2013, while average in-store prices increased by 2.8% in May, the fastest growth since March 2012.