UK's 'Downbeat' Economy 'Faces Prolonged Weakness' - EY Item Club Report

Speaking earlier this month, the International Trade Secretary Liam Fox, called Brexit "a golden opportunity" which will offer a "tremendous opportunity to shape the world for the benefit of all."

However, a new report analyzing the potential impact of Brexit on the UK economy has revealed a far less rosy picture. In fact, according to the influential financial forecaster EY Item Club, many Brits should expect challenges as opposed to the benefits promised by Mr. Fox.

"So far it might look like the economy is taking Brexit in its stride, but this picture is deceptive," said Peter Spencer, chief economic adviser to the EY Item Club.

The think tank is the only non-governmental forecasting group to use the UK Treasury's model of the UK economy to predict future financial trends.

It forecasts that inflation — which has been below 1% for nearly two years — is set to climb to 2.6% in 2017, before easing back to 1.8% in 2018. As a result, unemployment will rise, and consumer spending will slow from an expected 2.5% this year to just 0.5% in 2017, and 0.9% the year after, the report said.

The ongoing uncertainty over what deal the UK will be able to negotiate from the EU, together with the volatility of the pound, is expected to hit investment levels, costing UK firms millions in lost capital. Business investment is predicted to drop by 1.5% this year, and more than 2% in 2017.

"Sterling's shaky performance this month provides a timely reminder that challenges lie ahead. As inflation returns over the winter it will squeeze household incomes and spending. The pressure on consumers and the cautious approach to spending by businesses mean that the UK is facing a period of relatively low growth," Peter Spencer said.

Mark Gregory, the think tank's chief economist, added:

"The economy has not fallen off a cliff since the referendum, but recent developments have led to a more downbeat assessment of the outlook. The holidays are over and businesses are now looking hard at plans and budgets. Both investment and hiring plans are likely to be squeezed in the current environment."

The UK imported more than US$625 billion of goods and services in 2015, from Germany, China, the Netherlands, the United States and France.

That was while the UK was a part of the EU's single market, a custom's union allowing the freedom of movement of goods and services, without expensive tariffs being imposed.

EY Item predicts that the UK is likely to be face "a hard" Brexit from the European Union, with access to the single market being denied.

In which case, British consumers can expect to see price hikes in the coming months and years. A falling pound means that imports will become more expensive.

"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 UK negotiates with the EU over the longer term," according to the EY Item Club report.

Indeed, there is some good news for British exporters. The weakening pound has meant that conversely, UK exports have gone up. 

This Brexit "silver lining" means that UK goods are cheaper for international buyers to purchase.

Once the UK has left the EU, the EY ITEM Club says that making use of the UK's new-found freedoms to access cheaper international markets in food and manufactures will benefit consumers.

Expects are predicted to increase by 4.5% in 2017, and 5.6% in 2018. The growth in the UK's export businesses are forecast to add 0.8% to GDP next year, accounting for almost all of the economy's expected growth.

However, it's not yet what EU tariffs or other trade barriers UK businesses selling to the European Union may face.

The EU currently accounts for 45% of UK exports.