Britain should beware of being overconfident as the economy is heading for a slump, top forecasters will say tomorrow.

The influential EY Item Club is predicting that growth will slow to just 1.3 per cent this year and will remain below 2 per cent until 2020.

Mark Gregory, EY’s chief economist, said: ‘Businesses and consumers need to avoid being lulled into a false sense of security.’

Higher prices: The EY Item Club said inflation would rise to 3.1 per cent this year

The latest forecast for 2017 is higher than the group’s previous estimate, but it warns that next year will be slower than expected with growth of just 1 per cent.

The gloomy announcement comes days before the release of figures which are expected to show the economy continued to grow strongly following the Brexit vote.

The Office for National Statistics is expected to say on Tuesday that GDP grew by 0.5 per cent in the final quarter of last year, having grown by 0.6 per cent in the previous three-month period.

Poll Will the UK economy benefit long-term from Brexit? Yes No It won't matter Will the UK economy benefit long-term from Brexit? Yes 320 votes

No 183 votes

It won't matter 34 votes Now share your opinion





Paul Hollingsworth, UK economist at Capital Economics, said: ‘The economy looks likely to have posted another quarterly expansion of about 0.5 per cent in Q4, if not more.

'This would give average growth in 2016 as a whole of 2 per cent, only a little slower than the 2.2 per cent growth recorded in 2015.’

Many forecasters had predicted a recession caused by uncertainty over future trade arrangements – with the Treasury before the vote having forecast a year-long decline.

The EY Item Club said inflation would rise to 3.1 per cent this year with spending taking a hit from higher prices. But it said inflation would fall to 2 per cent next year.

FTSE 100's record-breaking winning streak draws to an end

The forecast comes hot on the heels of London's leading stock market, the FTSE 100 going on a tear, causing jubilation among investors and pension savers with money in shares and funds.

The Footsie notched up 12 all-time closing records in a row and set an all-time trading high of 7,354.1 before the rally ground to a halt this week.

Analysts have said that this reflects the international nature of the stock market index, rather than a huge dose of optimism for the UK's Brexit future.

As the pound has fallen against the US dollar and euro, those companies that earn large amounts overseas have benefited from an effect that will see those profits magnified when translated back into sterling.

Recent gains are not just about the weak pound, but because a bit more optimism is creeping in

Companies with a lot of assets overseas, or who do a lot of business outside the UK, are prominent among the stock winners of recent times.

However, while the gains for many of Britain's biggest corporate players have a lot to do with the fall in the pound, that is not the whole story.

Hargreaves Lansdown's Laith Khalaf points out that some UK domestic stocks have done well too, which suggests recent gains are not just about the weak pound, but because a bit more optimism is creeping in about the outlook at home as well.

The more UK-focussed FTSE 250 index of mid-cap companies has also recorded record high levels and is up about 6.5 per cent compared to before the Brexit vote.

Economists expect rising inflation to eat into consumer spending, however, while producers are also suffering inflation on imported materials. The ONS reported this week that inflation rose to 1.6 per cent in December.

Chris Williamson, analyst at IHS Markit, said: 'Inflation looks inevitably set to rise further in 2017, with 3 per cent likely to be seen by the second half of the year.

'Whether the central bank will tolerate this level of inflation remains very uncertain, but will most likely depend on the extent to which consumers continue to spend in the face of Brexit worries and higher prices.