Return to growth for UK economy, says ITEM Club
Falling inflation boosts economy in second half of the year
The UK economy should enjoy an ‘Indian summer’ after a dismal first half of the year, according to the Ernst & Young ITEM Club, which has forecast that the economy will return to growth over the next six months, boosted by falling inflation and a pickup in consumer spending.
According to the ITEM Club’s latest quarterly forecast, released today, inflationary pressures that have been battering household incomes are now easing much quicker than expected. Providing that commodity prices remain subdued, ITEM Club says that inflation should hit 1.7% by the end of the year, giving consumers extra cash in their pockets to spend on the high street.
However, the report warns that the fillip to consumer spending in the second half of the year will only enable UK GDP to mark time, with zero growth in 2012 as a whole. Longer term, sustainable growth remains dependent on an improvement in the UK’s export performance and business investment. ITEM is forecasting 1.6% GDP in 2013 and 2.6% in 2014.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said: “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.
“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.”
According to the report, real disposable incomes are forecast to increase by 0.4% in 2012, before increasing by 1.5% in 2013. Consumer spending is expected to be flat for the year as a whole, with falls in the first half reversed in the second half, but stages a more convincing recovery in 2013, growing by 1.5%. Unemployment is expected to hit 8.6% by the end of the year, peaking at 8.7% by 2013.
Despite recent disappointing trade figures, ITEM said the outlook has improved since its last quarterly forecast in April. “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,” said Spencer.
An improving outlook for world trade and business confidence is also expected to lead to an uplift in business investment. Growth of 4.3% is forecast for this year (artificially inflated by last year’s weak first quarter) and 3.4% in 2012. But business investment will only return to pre-recession peaks in 2015.
“The prospect of a durable UK recovery remains heavily dependent upon confidence in financial and business communities and it’s going to take time to rebuild,” Spencer commented. “However, a resolution of uncertainty about the Euro could transform the outlook, pushing company spending up much faster than forecast.”