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20 Oct, 2014 12:21

'U​ncertainty shock’: Hung parliament and EU referendum threaten UK economy

'U​ncertainty shock’: Hung parliament and EU referendum threaten UK economy

Investors are concerned about the future stability of Britain’s business environment, warning of a “huge uncertainty shock” if the UK leaves the European Union, or ends up with another coalition government after next year’s general election.

In a new report published on Monday, the EY ‘ITEM Club’ predicts that growth investment in the UK will fall from 9 percent to 5.8 percent, while GDP growth will fall from 3.1 percent to 2.4 percent.

The figures reflect leading business figures’ concerns over the UK’s financial security, particularly as no major political party has made their position clear on Europe and a referendum.

The report also said “constitutional reforms in the UK” and the likelihood of another ‘hung parliament’ – where no party secures an overall majority in an election – would make it difficult for investors to forecast the future of the British economy.

“Let’s be clear, the forecast for growth is still relatively good. What has changed is the global risks surrounding the forecast and the headwinds facing investment by firms,” said the chief economic adviser to the Item Club, Peter Spencer.

“Looming political uncertainty risks denting corporate confidence. The question now is how will these risks play out?”

The report added that geopolitical risks in the Eurozone, alongside conflicts in eastern Ukraine and the Middle East, would make a heavy impact on British exports, with Spencer claiming Britain’s export market would “look dreadful” and is unlikely to make a contribution to GDP growth until after 2017.

“However, at least the domestic economy is in a better position than before to help the UK ride out the storm,” he commented.

The rise of anti-EU parties such as the United Kingdom Independence Party (UKIP), which won its first parliamentary seat in Clacton-on-Sea earlier this month, has caused concerns that the Conservative Party will try to fast-track a referendum vote on EU membership. This, the report claims, is “likely to raise fresh uncertainties” on businesses reliant on European trade.

The report comes as outgoing EU President Jose Manuel Barroso warned the UK it would be making an “historic mistake” if it voted to leave the EU, which would mean a risk of wielding “zero” influence on the international stage.

Outgoing European Commission President Jose Manuel Barroso (Reuters / Bernadett Szabo)

In a speech at Chatham House on Monday, Barroso said that UK politicians needed to learn lessons from the Scottish independence referendum, and make a “positive case” for EU membership.

“We saw in Scotland that you actually need to go out and make the positive case. In the same way, if you support continued membership of the EU you need to say what Europe stands for and why it is in the British interest to be part of it,” he said.

The ITEM report also notes that the UK economy may find itself in a slump due to falling real wages, as the Bank of England pursues its low inflation strategy to keep the economy growing. As a result, “business investment” has taken over as the “engine of recovery” the report adds.

“The first wave of investment is now well under way, but on the ground businesses are becoming nervous. They are faced with an uncertain domestic political situation, while there are renewed concerns about their key export markets,” EY chief economist Mark Gregory warned, following the report’s publication.

“They haven’t pulled on the reins just yet, but there is a definite sense of caution. This is a time for cool heads.”

The UK economy is expected to grow by 3.5 percent this year, and 3 percent in 2015, according to forecasts from the Bank of England. However, the IMF has downgraded these estimations, suggesting the UK will grow by 3.2 percent by the end of 2014, and 2.7 percent in 2015.