Britain’s economy faces “tougher years ahead” and interest rates are likely to remain on hold for another year, a leading forecaster has said.
Growth will be “harder to win” over the next three years as consumers no longer enjoy the “sugar rush” of lower fuel prices, according to the latest quarterly forecast from the EY Item Club.
It expects slower consumer spending to stay the hand of the Bank of England’s rate-setting committee until autumn next year.
While the UK can expect to enjoy “solid growth” over the next three years, a stabilisation in commodities prices will lift inflation, and cause consumer spending to slow thereafter. As a result, the country will have to lean harder on increases in business investment and productivity.
EY Item Club’s autumn report is set to forecast that consumer spending growth is likely to decelerate from 3 per cent this year to 2.6 per cent next year, and 2.1 per cent in 2017. This follows an expansion of 2.9 per cent in 2014.
Mark Gregory, EY’s chief economist, said: “With the Government reining in spending to reduce the deficit, it will be the consumer driving UK economic growth this year.”
The introduction of chancellor George Osborne’s national living wage will cause wage growth to accelerate, EY forecasts, and “should act as a spur for companies to continue to drive gains in productivity”.
But the rising cost of labour will prompt many companies to invest in capital, rather than choosing to add staff, EY warned. The Office for Budget Responsibility has estimated that employment will suffer a 60,000 hit as a result of the policy.
“We expect employers to respond by employing more capital to help meet new demand,” the report said. Corporates are in “good financial shape” to expand in this way, with strong profitability and balance sheets, while the availability of finance has improved.
The latest warning of tougher times ahead follows more negative economic data last week.
On Friday, it was revealed that UK construction, which accounts for about 6 per cent of GDP (gross domestic product), fell 4.3 per cent in a rainy August – its sharpest rate of contraction in more two‑and‑a‑half years.
The Office for National Statistics also said that the deficit in Britain’s trade in goods narrowed in August, but was bigger than expected and was also set to weigh on growth.