Brace for “hard rebalancing” of UK economy in 2017

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The fall in the pound will result in a “significant readjustment” of the UK economy away from consumer spending and towards exports, regardless of the results of the Brexit negotiations.

Economists at Ernest & Young says UK exports will increase by as much as 3.3 per cent this year, and 5.2 per cent in 2018, as the rise in import costs reduces consumer demand for imports and improves profitability for UK exporters.

The boost to exports is expected to add 0.8 per cent to GDP after 2018 and reduce the current account deficit from 4.5 per cent of GDP in 2017 to 2.5 per cent in 2019.

The improved picture for exports is set against the backdrop of slow growth for the UK economy overall – just 1.3 per cent in 2017, and 1 per cent in 2018.

Mark Gregory, EY Chief Economist, said: “Whatever the outcome of the Brexit negotiations, there are clear indications that the fall in the pound and the UK’s exit from the EU will entail a change in the structure of the UK economy. The onus will be on businesses to adapt to the slowing domestic economy by seeking opportunities overseas.”

The report also predicted that inflation could rise to 3.1 per cent by the end of the year, but will fall back to 2 per cent at the end of 2018.

Future growth in the UK economy will be “critically dependent upon a strong trade performance” according to the Ernest & Young ITEM Club, a forecasting body that uses HM Treasury’s model of the UK economy.

“The fall in the pound should help boost exports in the near term”, said Peter Spencer, the EY ITEM Club’s chief economic advisor.

“However, trade performance and growth in 2019 and beyond will depend critically upon the exit terms that can be agreed with the EU27 and other countries.

Liam Fox, the international trade secretary, has earmarked 50 countries as key export destinations for British businesses. Infrastructure projects in Hong Kong, opportunities for financial services in Australia and IT operations in India are among the sectors trade department officials have identified as potential growth areas.

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