UK economy set for

16th July 2012

The London-based group, which uses an economic model similar to that of the U.K. Treasury to make its forecasts, believes inflationary pressures that have been hammering household incomes are now easing much quicker than expected. The ITEM Club says inflation should fall to 1.7% by the end of the year, providing that commodity prices remain subdued, giving consumers more money spend on the high street.

Still, the report warns that the boost to household spending in the second half of the year will only cancel out the falls in the first half, with zero growth expected in the year as a whole. ITEM Club says economic growth in the long-term will depend on an improvement in the performance of the UK's export sector and an uptick in business investment. ITEM is forecasting a 1.6% rise in GDP in 2013, followed by a rise of 2.6% in 2014. And in spite of the recent disappointing trade figures, the report says the outlook has ‘cheered up' a bit since its last quarterly forecast in April.

Peter Spencer, the chief economic advisor to the Ernst & Young ITEM Club, explains: "The Eurozone crisis remains a major risk to the forecast, but it is just possible that the EU summit in June, together with the tough new fiscal rules agreed in December, have laid the foundations for a gradual revival of business confidence – providing the proposals go ahead as planned. Closer to home, the Treasury's ‘funding for lending scheme' also looks promising and should help to free up credit flows.

"We are expecting net trade to contribute very little to GDP this year, just 0.1%, but once the concrete has set, the contribution to growth should build steadily."

In addition, Spencer, warns analysts not to expect a consumer-led recovery: "Spiralling inflation has cut real wages by 7.5% over the last four years, but the squeeze is almost over. Inflation is now coming back to heel, helped by the Chancellor's decision to postpone the increase in fuel duty, falling energy and commodity prices, plus tax changes dropping out of the calculation.

"The boost to household finances and the subsequent pick up in spending should be enough to push the UK back into positive territory this year, but don't expect a consumer led recovery further out. Longer term, consumers are going to be more focused on reducing their debt burden rather than splashing the cash."

In terms of unemployment, the report says that sluggish GDP growth will reverse the positive trend that was seen in the earlier part of the year, with unemployment expected to hit 8.6% at the end of the year. "It's going to be difficult for the private sector to create jobs at its current rate and to compensate for losses in the public sector. With the size of the workforce continuing to increase, the unemployment rate is likely to nudge up. This will also have a knock on effect on pay settlements, weakening employees negotiating power and keeping earnings growth subdued for some time yet," said Peter Spencer.

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