The U.K. will fall into a “short, shallow recession” around the turn of the year as Brexit hits house prices, jobs and spending, according to the EY Item Club.
In a report to be published Monday, the forecaster will say it’s slashing its 2017 growth estimate to 0.4 percent from 2.6 percent and predicting the Bank of England will cut interest rates to zero by the end of 2016. Tax reductions are also a possibility, it will say, as the government scales back austerity to aid an economy reeling from the shock vote to pull Britain out of the European Union.
“There are likely to be severe confidence effects on spending, only partially cushioned by a fall in the pound,” the report will say. “We would expect a permanent reduction in the level of U.K. output and productivity.”
Business investment will drop 2 percent next year and the jobless rate will reach 7.1 percent by 2019, EY will also say. It expects consumer spending to fall 0.6 percent in 2017, with big-ticket items particularly affected. House prices will plunge 4 percent. There is “nothing to support the housing market in this situation,” it will say.
Exports represent the only bright spot, predicted to increase 3.4 percent next year as the sharp fall in the pound makes British goods more competitive on world markets. That combined with the weakness of domestic demand should lead to a near halving of the current-account deficit to 58 billion pounds ($77 billion), it will say.