ITEM club suggests slowdown

Author: ross sturley cimcig

The post-referendum economy will follow a very different path from the one envisaged by the EY ITEM club in April, which assumed a vote to remain in the EU.

Short-term, although the fundamentals will not change, there are likely to be severe confidence effects on spending, only partially cushioned by a fall in the pound. They forecast GDP growth of 1.9% this year, followed by just 0.4% next year and 1.4% in 2018.

The financial markets have stabilized following the initial shock, but they expect the downward pressure on the exchange rate to persist, leaving the sterling exchange rate index in the last quarter of this year down 15% on a year earlier. They say that, judging by the experience of the ERM exit in 1992, the weakness of the economy should keep inflation under control and the MPC will cut base rates from 0.5% to zero by the end of the year, with an average CPI inflation rate of 2.5% next year.

They point to "worrying" business polls, and a drop in consumer confidence as bad indicators, and suggest that the jitters seen in the run up to the referendum which held back business, will continue to do so.

They think that Theresa May’s new government will make control of immigration its top priority, at the expense of access to the single market. Although their forecast does assume that the UK is able to negotiate a free trade agreement with the EU, similar to the recent EU-Canada deal. They acknowledge that could prove to be optimistic.

See more from the forescast at http://www.ey.com/UK/en/Issues/Business-environment/Financial-markets-and-economy/ITEM---Forecast-headlines-and-projections