UK economy will be among the slowest growing in the EU this year and is “particularly exposed” to the escalating US trade war, the European Commission has warned.
The Commission is forecasting “modest” UK gross domestic product (GDP) of 1.3% in 2018, with growth remaining weak in 2019 at 1.2%, but warned the risks were “to the downside”.
Its latest predictions place the UK at the bottom of the GDP league across the 28-nation bloc, alongside Italy.
The Commission also cut its forecasts for growth across the eurozone as a whole, blaming the impact of the trade tensions sparked by President Trump and higher oil prices.
It said the UK, as an open economy, was at risk of an “escalation in trade protectionist measures that could further inhibit export growth”, that could slow growth even further.
The Commission is predicting the 19-country eurozone will grow by 2.1% in 2018, lower than the 2.3% predicted in May and down on the 2.4% recorded last year.
Growth will slow further to 2% in 2019, it said.
Will things improve?
Valdis Dombrovskis, a vice-president at the Commission, said: “The downward revision of GDP growth since May shows that an unfavourable external environment, such as growing trade tensions with the US, can dampen confidence and take a toll on UK economy expansion.”
Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, added: “Trade wars produce no winners, only casualties.”
In its report, the Commission said the UK would not recoup the output lost due to the snow in the first quarter, when growth slowed to 0.2% from 0.4% in the previous three months.
It said: “For 2018 as a whole, private consumption growth is expected to remain subdued despite support from generally easing inflation, reflecting low consumer confidence and an anticipated stabilisation in the household saving rate.
“Business investment growth is projected to remain weak while uncertainty over the UK’s future trading relationship with the EU remains.”
Could lower inflation help?
In 2019, it said any boost from lower inflation would be offset by moves among households to save instead of spend, while business investment would remain “subdued”, according to the report.
But it also cautioned that, as its forecasts were based on a “benign” Brexit deal scenario, “the risks to the 2019 baseline forecast are large and predominantly to the downside”.
It is forecasting UK inflation to remain above the 2% target in 2018 at 2.6%, but to slow over the course of the year and drop to 2% in 2019.
The unwinding of Brexit-fuelled inflation caused by the pound’s fall since the referendum would be partially offset by surging oil prices, the report said.