UK economy 'should weather' the Brexit storm with little damage if no deal is avoided

Although uncertainty around Brexit is impacting on business sentiment, it may not damage the UK economy as much as expected if a deal can be done, according to ICAEW.

In its latest economic forecast, the accountancy body said: "The UK economy continues to enjoy some positives with pay growth continuing to outstrip inflation, unemployment forecast to remain very low and fiscal austerity being relaxed. Overall, the 2019 growth forecast is expected to increase from 1.3% to 1.5%.

"But while heightened and ongoing political uncertainty presents a risk to this outlook, it need not be too damaging to the overall economy. After the EU referendum in 2016, many expected a recession to follow. But in practice, GDP growth accelerated afterwards with the slowdown in 2017 and 2018 more modest than some forecasters predicted.

"In addition, while growth in real consumer spending in recent years has been depressed by higher inflation, growth in cash terms has been steady. An effective response from the Bank of England, not least continued low interest rates, has and should continue to aid the economy while the government has relaxed fiscal austerity via tax cuts and extra public spending."

Michael Izza, ICAEW chief executive, added: "There is no doubt that heightened Brexit-related uncertainty is weighing on business sentiment. Household and company spending and saving decisions are influenced by expectations of the future economic situation. But as long as a 'no-deal' Brexit is avoided, history suggests that the current 'new normal' of elevated uncertainty may not impact as much as some expect.

"Of course, cuts in investment by some businesses in response to uncertainty are unlikely to be reversed, even once the UK's departure from the EU has been resolved. But if policymakers remain on the ball, the overall macroeconomic effect of the Brexit limbo businesses currently find themselves in should be manageable."