A sharp fall in consumer spending and business investment is expected to drag Britain's growth rate down to just 1.3 per cent this year, bringing hopes that the UK's sluggish rate of expansion in the first six months will recover in the second half of the year. Consultancy KPMG stated that Brexit uncertainty will take a bigger toll on the economy than many forecasters, including the Bank of England, expect following a slump in consumer spending from 1.9 per cent last year to 1.2 per cent in 2018, and an even bigger drop in business investment, from 3.4 per cent in 2017 to 0.8 per cent this year.
The report has warned that despite growing difficulties finding staff, intense pressures on profit margins and Brexit uncertainties would dictate caution. KPMG said, “If productivity growth remains at around 1 per cent then, as a basic rule of thumb, we would expect wages to rise by around 3 per cent on average,” giving workers only a small real-terms rise over an inflation rate running at 2.3 per cent.
The predictions coincide with figures from the retail industry showing a 1.6 per cent falls in the number of people visiting high street shops in August compared with last year. The agency said that in its quarterly health check of the British economy that uncertainty and risks around Brexit were likely to put a brake on further interest rate rises by the Bank as policymakers remained cautious “during the critical months ahead.”
“Interest rates are likely to be cut to at least 0.25 per cent if negotiations are not successful, with additional measures to be announced by the (Bank of England) to ease any significant pressure on the banking sector,” the report said. Yael Selfin, chief economist at KPMG UK said, “If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4 per cent in the medium term as a result of relatively weak productivity. If we see a disorderly Brexit, growth will obviously slow more dramatically. If negotiations end well, the MPC are likely to raise interest rates to 1 per cent at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”
The Office for National Statistics said the UK economy grew by 1.7 per cent during 2017. Growth slowed to 0.2 per cent in the first quarter of 2018, recovering to 0.4 per cent in the second quarter. “High price levels, uncertainty around the future economic outlook and rising interest rates are expected to take their toll in London and the south-east especially. House prices in the capital are expected to drop by 0.7 per cent in 2019,” the report said. It added, “In regions with lower pressures on valuations, such as Scotland, there is expected to be growth of 4.9 per cent in 2018.”
