Weaker sterling fails to deliver economic bounce for UK

British Chambers of Commerce downgrades medium-term outlook for UK economy

The British Chambers of Comerce has downgraded its medium-term forecats for the UK economy, saying that the weaker pound is failing to boost growth. Photograph: Stefan Rousseau/PA Wire

The British Chambers of Comerce has downgraded its medium-term forecats for the UK economy, saying that the weaker pound is failing to boost growth. Photograph: Stefan Rousseau/PA Wire

 

The weaker pound is failing to boost UK economic growth, according to the British Chambers of Commerce.

The business group downgraded its medium-term outlook for the economy in a report on Friday, citing a weaker-than-expected contribution from trade and subdued consumer spending.

“A cheaper currency does not automatically mean an export boom, no matter how some politicians and commentators will it to happen,” said Adam Marshall, director general of the British Chambers of Commerce. “The rising upfront cost of doing business in the UK, the uncertainty around Brexit, and the constraints created by skills gaps and shoddy infrastructure collectively outweigh any benefit arising from the recent depreciation of sterling.”

Inflation will outpace wage growth until 2019, the chambers forecast, continuing the squeeze on shoppers’ pockets that weighed on performance in the first half of 2017.

While sterling’s plunge following the UK’s vote to leave the European Union last year helped cushion some of the initial impact of the decision, there is scant evidence it is leading to a sustained re-balancing of the economy. At the same time, the decline is pushing up prices for consumers, reducing their spending and threatening one the key drivers of expansion.

“It is increasingly clear that the post-EU referendum slide in the value of sterling has done more harm than good,” said Suren Thiru, head of economics at the chambers. “The contribution of net trade to UK GDP growth is not expected to be as strong as we previously predicted, as we see little evidence that the depreciation of the pound is materially boosting the UK’s external position.”

The chambers downgrade to its net trade contribution estimate is mainly based on a rising forecast for import growth, with few signs customers are switching away from goods brought in for overseas despite their rising costs. That chimes with the current picture in the UK, where net trade made no contribution to growth in the second quarter.

A report later Friday will show the trade deficit narrowed slightly in July, according to economists surveyed by Bloomberg, rebounding from the widest in almost a year. Still, the forecast reading is above the UK’s five-year average, suggesting the pound’s decline has failed to improve the nation’s position.

UK growth has slowed in 2017, with survey data suggesting the third quarter will see more of the same, according to IHS Markit. While the chambers slightly increased its 2017 growth estimate to 1.6 per cent from 1.5 per cent, the forecasts for 2018 and 2019 were both cut by 0.1 percentage point to 1.2 per cent and 1.4 per cent respectively.

The forecasts are based on a “relatively smooth” exit from the EU, and a “more sudden departure would be likely to trigger a far more marked weakening in economic conditions,” according to Mr Thiru.

The chambers also sees the Bank of England raising interest rates to 0.75 percent by the end of 2019, with the first 25-basis-point increase coming the the third quarter of 2018, two quarters later than previously forecast. – Bloomberg