The U.K. economy is set to undergo a fairly gradual dip and recover over the coming four years as the country is set to initiate steps to leave the EU this year.
According to the EY ITEM Club winter forecast, released Monday, the economy has to shift its reliance from consumer spending towards exports as households started to contain their expenditure due to rising inflation.
Consumer price inflation accelerated to 3.1 percent in the final quarter of 2017 due to the recent slump in sterling. However, the weak pound and a softer domestic market are likely to encourage U.K. exports.
While economic growth will be better balanced it is also likely to be slower, the think tank noted.
The ITEM Club expects GDP growth to reach 1.3 percent this year instead of 0.8 percent it projected in October last year. Growth is forecast to ease to just 1 percent in 2018.
"We now expect the impact of Brexit on the UK economy to be shallower, but more prolonged than we did in October," Peter Spencer, chief economic advisor to the EY ITEM Club, said. "However, there is a sea change coming over the next three years."
Citing weak growth, employment is forecast to rise by just 0.2 percent in 2017, before falling 0.2 percent in 2018. The forecast sees unemployment rising from 4.8 percent in the final quarter of 2016 to more than 6 percent by the end of 2018.
The Bank of England is forecast to hold interest rates at the current 0.25 percent until the spring of 2018.
The think tank said inflation is set to rise temporarily to 3.1 percent by the final quarter of this year before easing to the BoE's 2 percent target next year.
The most likely outcome of the 'Brexit' vote is that the UK will be trading with the EU under World Trade Organization rules by the end of the decade, the EY ITEM Club said.
Exports are forecast to grow 3.3 percent this year and 5.2 percent in 2018. Net exports will add an average of 0.75 percent a year to UK GDP from 2018 to 2020.
"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," Spencer added.
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