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UK growth 'to slow as economy rebalances' UK growth 'to slow as economy rebalances'
(35 minutes later)
The UK economy will see three years of "relatively slow growth" as it comes to rely more on trade and less on consumer spending, a think tank says.The UK economy will see three years of "relatively slow growth" as it comes to rely more on trade and less on consumer spending, a think tank says.
The influential EY Item Club said higher inflation caused by a weaker pound would result in GDP growth of 1.3% in 2017 and just 1% next year.The influential EY Item Club said higher inflation caused by a weaker pound would result in GDP growth of 1.3% in 2017 and just 1% next year.
However, it also said rising demand for exports would offset this somewhat. But it said rising demand for exports would offset this somewhat.
Future growth will be "critically dependent upon a strong trade performance," it added. A separate survey has found optimism in the financial services sector hit its lowest level since the 2008 crash.
Sterling has fallen by 17% against the dollar since the UK voted to quit the European Union last June, increasing import costs and pushing up shop prices.Sterling has fallen by 17% against the dollar since the UK voted to quit the European Union last June, increasing import costs and pushing up shop prices.
In its latest forecast, the Item Club said it expected inflation to rise to 3.1% by the final quarter of 2017 before easing back to 2% by the end of 2018. In its latest forecast, the EY Item Club said it expected inflation to rise to 3.1% by the final quarter of 2017 before easing back to 2% by the end of 2018.
On top of this, it said unemployment was likely to climb from 4.8% in the final quarter of last year to more than 6% by the end of 2018.On top of this, it said unemployment was likely to climb from 4.8% in the final quarter of last year to more than 6% by the end of 2018.
"[These factors are] expected to have a knock-on impact on consumer spending, as growth in disposable incomes is eroded," the think tank said."[These factors are] expected to have a knock-on impact on consumer spending, as growth in disposable incomes is eroded," the think tank said.
Export growthExport growth
But the agency also said that a "weaker pound and a softer domestic market" were likely to encourage higher levels of UK exports, as businesses seek income opportunities overseas.But the agency also said that a "weaker pound and a softer domestic market" were likely to encourage higher levels of UK exports, as businesses seek income opportunities overseas.
It expects exports to increase by 3.3% this year and 5.2% in 2018.It expects exports to increase by 3.3% this year and 5.2% in 2018.
"A weakening labour market, tepid growth in wages and rising prices on the high street will squeeze household spending in 2017, in particular on discretionary items," said Peter Spencer, chief economic advisor to the EY Item Club. Peter Spencer, chief economic advisor to the EY Item Club, said that the fall in sterling after the Brexit signalled "a permanent shift" in the fundamental value of the currency.
"However, there is a sea change coming over the next three years. "We know that it will crush consumer spending, we'll see a progressive slowdown in retail sales and indicators like that this year, almost certainly," he told the BBC.
"The fall in the pound will force the economy to be less reliant on consumer spending, leaving growth heavily dependent upon trade performance." However, he also said it would offer a "permanent incentive to investors to go out, win new customers [overseas], and build capacity and expertise".
However, while he said the fall in the pound should boost exports in the near term, "trade and growth" in 2019 and beyond would largely be determined by the terms of Britain's exit deal with the EU. "The hard bit comes from getting exports up to pick up the slack left by the fall in consumer spending," he said.
He said that a weak pound should boost experts in the near term, but that "trade and growth in 2019 and beyond" would largely be determined by the terms of Britain's exit deal with the EU.
If exports did not pick up, the UK would be "pretty much stuck in a slow growth economy", he added.
Financial servicesFinancial services
It comes as a separate survey found optimism among Britain's financial services firms fell for a fourth consecutive quarter in December. It comes as a PwC survey found optimism among Britain's financial services firms fell for a fourth consecutive quarter in December.
The consultancy PwC, which surveyed 103 financial services firms on behalf of the Confederation of British Industry (CBI), found 2016 to be the "gloomiest" year for the sector since 2008. The consultancy, which surveyed 103 financial services firms on behalf of the Confederation of British Industry (CBI), found 2016 to be the "gloomiest" year for the sector since 2008.
Banks were especially pessimistic, with 90% saying that preparing for the impact of Brexit was their biggest challenge.Banks were especially pessimistic, with 90% saying that preparing for the impact of Brexit was their biggest challenge.
Many have signalled they are working on plans to deal with a so-called "hard" exit from the EU, after Prime Minister Theresa May said Britain will leave the single market.Many have signalled they are working on plans to deal with a so-called "hard" exit from the EU, after Prime Minister Theresa May said Britain will leave the single market.
Two of the largest banks with operations in London - HSBC and UBS - said last week they were considering moving thousands of jobs abroad.Two of the largest banks with operations in London - HSBC and UBS - said last week they were considering moving thousands of jobs abroad.