The British economy will start to see deeper impacts from the Brexit vote over the next six months with rising inflation and falling business investment, the consultancy firm Ernest & Young said Monday.
So far the U.K. has managed to resist economic shocks from the decision to the leave the European Union, but expectations of falls in consumer spending, higher inflation and lower levels of business investment paint a more dramatic outlook for the upcoming months and years.
“We think over the next six months or so we will start to see the after effects of that vote coming to play,” Martin Beck, senior economic advisor to the EY ITEM Club, told CNBC Monday.
“The falling pound is going to push import prices up, will raise inflation, that will depress consumers’ purchasing power and as Brexit becomes more of a hard reality, the business investment is likely to suffer because of the uncertainty around what will be the U.K.’s trade future relationships with the EU.”
According to EY’s latest autumn forecasts, the U.K. should grow at a pace of 1.9 percent in 2016, but its GDP (gross domestic product) should reach only 0.8 percent in 2017. It is expected that consumer spending will be significantly hit by the Brexit vote, with a forecast growth of 2.5 percent for this year to 0.5 percent in 2017.
The consultancy firm also forecast inflation to peak to 2.6 percent next year before easing to 1.8 percent in 2018.
Beck recognized that “it is particularly difficult at the moment” to predict how the U.K. economy will perform. “We don’t really know how the future shape of the economy is going to evolve. We don’t know whether we will have a ‘soft Brexit‘ or a ‘hardBrexit‘ … Every day is bringing new stories, new rumors, the picture is constantly evolving,” Beck said.
On Monday, The Financial Times reported that the British government is considering a plan to continue paying billions into the EU budget to keep having access to the EU’s single market. However, it seems possible that the U.K.’s financial industry could lose “pass porting” rights as Prime Minister Theresa May looks to regain border controls.
The EY Item analysis expects the U.K. to opt for a “hard Brexit,” which would mean that the EU and U.K. trade relationship would operate under World Trade Organization’s rules once “Article 50” is triggered.
“In this scenario, offsetting the cost of losing unfettered access to the European single market will depend crucially on accessing cheaper world markets in food and manufactures. This will provide some compensation while the U.K. negotiates with the EU over the longer term,” the firm said in a statement.
Given the high levels of political uncertainty, Beck suggested firms to take a “wait-and-see” approach over the next couple of months, until British lawmakers give more clarity as to what they aim to achieve once “Article 50” is triggered.