UK squeeze 'almost over', says ITEM Club

16 July 2012 | By Gary Jackson

The UK economy will leave recession in the second half of the year as inflation falls and consumer spending rises, the Ernst & Young ITEM Club predicts.

However, the economic forecasting group also warns that longer-term sustainable growth will only be secured if the country’s exports and business investment start to show significant improvement.

The UK entered recession in the fourth quarter of 2011 and the Office for National Statistics’ most recent forecast said the economy contracted by 0.3 per cent in the opening three months of 2012. Economic indicators also remained weak across the second quarter.

The ITEM Club’s latest quarterly forecast says an “Indian summer” will allow the country to leave its current recession – although growth is expected to be flat for the whole year before rising to 1.6 per cent in 2013 and 2.6 per cent in 2014.

A drop in inflation is expected to aid the UK’s recovery. Inflation is likely to drop to 1.7 per cent by the end of the year, down from 2.8 per cent now, which the group says will spur consumer spending.

Ernst & Young ITEM Club chief economic advisor Peter Spencer says: “Spiralling inflation has cut real wages by 7.5 per cent 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.”

But Spencer says the country should not expect a consumer-led recovery to persist over the longer term but points out that the uncertainty over the eurozone crisis is holding back business investment and weakening exports.

“The prospect of a durable UK recovery remains heavily dependent upon confidence in financial and business communities and it’s is going to take time to re-build,” the commentator adds.

“However, a resolution of uncertainty about the euro could transform the outlook, pushing company spending up much faster than forecast.”

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