2012 economic forecast: CFOs predict 'double dip'

Commenting on the one year anniversay of the VAT rise to 20%, PwC's chief economist John Hawksworth said:

"The increase added around 1% to the level of prices in 2011, which compounded the tough squeeze on consumers from rising energy and food prices last year. That is a temporary effect though that should not adversely impact growth or inflation in 2012 or beyond, assuming no further rise. There will also have been positive economic effects from the VAT rise in terms of a smaller budget deficit and a consequent reduction in long term interest rates, although these are harder to quantify."

PwC partner Stephen Coleclough commented:
"It's interesting to note that other EU countries are now hiking up their VAT rate - it's increased in Italy and France, and in Hungary it's now up to 27%. These moves are inflationary and aimed at increasing revenues; they must also balance with the growth needs of the country."

We've received some lively responses from members in our LinkedIn discussion group.

John Stewart • The very arbitrary definition of a recession - reduced GDP for 2 consecutive quarters - makes it meaningless in a local or trade context. Certain sectors e.g. energy, are doing very well, while local areas e.g. London property, continue to prosper. Having said that, the fall-out from failed euro-currency clients, is bound to hit some exporters, but only for a few Summer months. Just think of these cheap Greek & Cypriot holidays!

Mike Sturgess • Whilst I realise that the Eurozone crisis will have an enormous impact on the UK's financial position, I also strongly believe that the economy is influenced by emotion and we can end up talking ourselves into recession if we're not careful - a kind of self-fulfilling prophecy.
Peter wanted some good news for a change. One possible good news story would be the Severn Barrage: http://www.bbc.co.uk/news/uk-wales-16070872.
The government said last year that it couldn't fund such a project, but there is a proposal for a £34 billion ten year project which would be privately financed, would bring jobs, help meet our 2020 obligations for renewable energy (generating 5% of the UK electricity) and create huge tax revenues for the government. Nor would it be the environmental disaster that some claim - indeed, it could help generate new bird-friendly habitats.
My only question is what's stopping the government from pressing ahead with it ASAP?

Christopher White • I hate being the bringer of bad tidings but I met with a client this morning who is a broker in the City.
Firstly, several years before the recession struck he had predicted everything that had happened and recommended I read a book called "Conquer the Crash"http://www.amazon.co.uk/Conquer-Crash-Survive-Deflationary-Depression/dp/0470870907/ref=sr_1_2?s=books&ie=UTF8&qid=1325773502&sr=1-2
What made that book interesting reading, apart from being incredibly accurate, was that it was written in March 2002!
Anyway experience has proven that he knows what he is talking about.
Today's predictions from him based on "City Talk":

• Things wont improve until 2016 
• That governments are running out of ways to keep things going 
• That the Euro is bound to collapse and they are emptying a bathtub with a thimble whilst the tap is running 
• That looking at Iceland today as one of the safest places to put your money shows that allowing a country to go bust is not the end of the world

So in a nutshell and in my opinion, we may not go into recession this year but that is not to say we will have a recovery. I think we will tick along with this constant fear UNTIL we have another recession and a stock market that doesnt fix itself within 12 months.
I hate to say it but I think recession #1 may have been a false dawn and I honestly think we need the Euro bubble to burst before anyone can look ahead with confidence that the worst is over.
As Mike rightly says, so much of this is based on emotion, but I think the whole world is expecting the Euro to fail so much now that it is bound to happen the only question is when?
Mr Cameron will probably have a smug look on his face at some point

Andy Wells • Two points. Firstly there has to be growth or the country is bust. Politicians don't recognise a world without growth. So we will need a bout of inflation which can easily be confused with growth. The country has finite resources and perpetual real growth seems unlikely to be possible forever. So the politicians and the media need to take a reality check (not economists though, because they know perpetual growth is always possible....) . 

Secondly, the Government does not understand the way that its policies hinder growth driven by the SME sector. I have heard it said many times that it is not worth the risk of employing people in a small business because of the costs and obligations that larger companies can absorb. That is exacerbated when the effect, if the business is successful, is an effective tax rate of 52% (42% is itself too high). Many people think £100k pa is enough for a decent lifestyle and are not encouraged to take risk or work harder when the Government plans to take so much of the end product. Those businesses are biding their time and not growing when they could. 

The risk/reward ratio is all wrong. That doesn't get mentioned as much as it could because entrepreneurs in that important category tend to keep their heads down. In other words there is potential there that better policies could unlock but it won't happen. That is not the product of proper research but we deal with a lot of small businesses.