Kristian Rouz — An association of British businesses has warned of a dramatic economic slowdown ahead, stemming from weak labor productivity, tepid wage growth and strained household finances. The UK's private-sector enterprises have also pointed to the all-time lowest savings rate and high indebtedness of their employees.
According to a new report by the British Chambers of Commerce (BCC), the UK economy will grow a dismal 1.3 percent this year, down from a previous forecast of 1.4 percent. Additionally, the BCC said it expected British GDP growth rate to accelerate to 1.4 percent next year, a downward revision from the previous forecast of 1.5 percent.
The BCC stressed they are expecting a lackluster performance in the consumer segment of the economy. Domestic consumption is driving over 75 percent of the UK's GDP.
"The economy is in a torpor, with uncertainties around Brexit, interest rate rises, and international developments such as a possible trade war and rising oil prices all having an impact," the BCC said.
British businesses are concerned with the extended period of uncertainty associated with the tumultuous Brexit process, which started almost two years ago — with the Brexit referendum in late June 2016.
During the fourth quarter of 2017 and the first quarter of 2018, the UK was the slowest-growing member of the G7, expanding at just 1.2 percent year-on-year, its weakest since 2012. This comes as the positive effects of robust growth in British manufacturing and tight labor market were offset by a resurgence in the pound sterling's FX rate and a high volatility in the financial sector.
"The BCC urges the government to focus as much as possible on the domestic business environment, reducing the uncertainty that firms face, and take action on skills shortages and poor mobile connectivity, which lower productivity and hold UK businesses back," the BCC said in its report.
Meanwhile, the Bank of England (BoE) disagrees with the BCC's projections, saying the UK economy would expand 1.4 percent this year after a weak near-zero growth at the start of the year, whilst accelerating towards 1.7 percent in 2019 when the Brexit process is finally complete.
The UK will be free to enter new trade deals immediately after exiting the EU in March 2019, and the most highly-anticipated trade deal is that with the US. The Trump administration has repeatedly expressed interest in striking a trade and economic accord with Britain, which could come about as a mutually-beneficial deal.
The BoE is set to have a Monetary Policy Committee (MPC) meeting later this week, and the board is expected to keep the UK's base borrowing costs unchanged in order to support the pace of economic growth at its current levels.
"The Monetary Policy Committee will be wary of providing any firm guidance over the likely timing of the next hike as it won't want to tie its hands," Luigi Speranza of BNP Paribas said.
The BoE is pursuing a gradual pace of monetary tightening, aimed at mirroring the US Federal Reserve's policies in order to avoid possible investment flight — which could occur if the US rates become too steep in comparison to the UK's borrowing costs.
In this environment, the UK's policymakers are focusing on supporting a resurgence in domestic manufacturing, whilst also seeking to lower energy costs and boost the UK's energy self-sustainability.
Whilst these concurrent processes are poised to contribute to broader GDP growth, the BoE is considering raising rates closer to the year's end and the move could attract additional investment capital to the UK.
"August would be too much of a gamble and we see November as the next best opportunity for a hike, assuming data strengthens more than we expect and that Brexit remains free of major disruption," Fabrice Montagne and Sreekala Kochugovindan of London-based bank Barclays wrote.
Meanwhile, a change in the Office for National Statistics' (ONS) methodology means data from the second quarter of this year won't be released until mid-August — stirring an even greater uncertainty for an extended period of time this year.
Observers are not expecting a sensible increase in UK investment until at least the fourth quarter of this year, meaning the country's economic expansion will likely fall in line with the more moderate projections this year.