Brexit to slow economic growth further in 2019, says report

The UK's economy will slow in the second half of the year as the impact of Brexit uncertainty weighs on growth, according to a leading economic forecaster.

The EY ITEM Club's spring forecast predicted growth of 1.3% for the full year, after a pace of expansion of 1.4% in 2018, and stated that stronger growth in the first quarter of the year will likely prove to be a "false dawn" as the full ramifications of Brexit have yet to be felt.

That was down from its winter forecast for a pace of expansion of 1.5%.

Growth at the beginning of the year had flown in the face of a global slowdown and was attributed to stockpiling ahead of Britain's exit from the European Union, though the effects of that were now expected to tail-off due to the newly extended exit timetable.

"The downward revision for 2019 primarily reflects Brexit uncertainties which are being prolonged by the delaying of the UK’s exit from the EU to a flexible 31 October deadline. A weakened global economic environment is also a factor. The delayed Brexit means the UK economy will likely end 2019 with less momentum than previously expected, which will have some dampening impact on growth in 2020," said the report.

Growth in consumer spending is expected to flag over the year, dropping from 1.6% last year to 1.4% as jobs and earnings growth could struggle despite the fact that wage growth has risen to its strongest level in more than a decade.

Business investment, which the report referred to as the economy's "weakest link" in 2018, was seen remaining under pressure even in the event of Britain leaving the EU with a deal, with any upside being tempered by the inevitable uncertainty over the nature of the future relationship between the two entities.

The forecast also warned that the sluggish economy will prevent the Bank of England from raising interest rates from 0.75%, just days before the central bank's monetary policy committee meet to discuss rates and release their quarterly inflation report.

"However, we would not rule out one 25 basis point hike to 1.00% over the summer if the UK economy shows resilience and the labour market continues to firm. Assuming there is no interest rate hike in 2019, we expect the Bank of England to raise interest rates twice in 2020 as it looks to gradually normalise monetary policy and as the economy is likely to be firmer," said the report.

EY Item Club also trimmed its GDP forecast for 2020, from 1.7% to 1.5%.