Ernst & Young ITEM Club spring forecast

UK Plc should take centre stage in the growth of the UK economy this year as business optimism rises on the back of a healthy world economy, leading to a long-awaited loosening of company coffers, according to the latest Ernst & Young ITEM Club quarterly forecast.  

Click here for a copy of the full report.

The report says that UK GDP will grow by just 1.8% this year, before rising to 2.3% in 2012 and 2.7% in 2013.

With prospects of a consumer-led recovery clearly non-existent at the moment, Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, says that the stage is now set for a major revival in business spending and forecasts that businesses investment will increase by 12% this year, before rising by 14% in 2012.

Spencer comments: “We have long maintained the view that UK Plc’s must play a central role in the UK’s economic recovery. The importance of companies releasing some of the cash they have stockpiled over the recession cannot be underestimated.  Their spare cash flows equate to nearly 7% of GDP.  And with consumers still under pressure, we’re unlikely to see a durable recovery until UK Plc starts increasing investment or returning profits to shareholders through dividends.”

He adds: “The purse strings are starting to loosen, with some spending on vehicles and other easy asset purchases beginning to take place. If UK companies want to increase their capacity and capitalise on the opportunities that come from an improving world economy, they will need to extend spending to plant and machinery, buildings and overseas market development.  But the danger is that if corporate treasurers continue to build up the cash pile rather than the business, they will find themselves being bought up on the cheap by predators."

ITEM Club also believes that the improving world outlook will translate in to growth of UK exports. The forecast sees exports rising by 9.9% this year, a view that is supported by the strong trade figures seen in the first two months of the year.

Real wages steadily eroding

Meanwhile the squeeze on UK households will continue, with real disposable incomes expected to fall for the second year running – a trend last seen in the mid-1970s – while unemployment will edge up to 8.3% in early 2012.

Added to this, the ITEM Club says that market fundamentals in the housing market remain very unsupportive. It is forecasting that declining real incomes and concerns about job security will see house prices resume their decline this year before stabilising in 2012 and starting to rise in 2013.

Interest rates and the MPC’s decision

With inflation expected to remain high this year, the MPC continue to be under pressure to increase base rates. However, ITEM Club cautions that raising rates prematurely - before there is any reliable evidence that the corporate sector recovery is fully under way - could have disastrous consequences. ITEM remains of the view that inflation will naturally ease next year, once the VAT hike and other temporary effects have passed out of the index.

Spencer explains: “A rate rise would be perverse at this stage, merely adding to the already intense pressure on UK consumers, as well as increasing the RPI and risking a rise in wage settlements. Companies hold the key to UK growth, and a premature rate rise could easily break the key in the lock.”

Spencer adds: “Unlike the European Central Bank, the Bank of England hasn’t yet seen any core strength in the UK economy. Manufacturing seems to be performing well, but is too small to get us very far.  Our forecast assumes that the MPC will keep interest rates on hold until November this year – when a revival should be evident. The economy will be much stronger next year as inflation falls back and the consumer begins to enjoy the recovery.”

A tough year but Osborne remains on track

Concluding, Spencer comments: “As we said this time last year, large companies are swimming in cash, while consumers are drowning in debt – a situation that has since become even more polarised. Companies now need to loosen their grip and put that cash to good use for any durable recovery to occur.

“Based on our forecasts the Chancellor is still on course to meet the fiscal target of balancing the books by the end of the current Parliament. However, the biggest threat to the recovery is still the MPC’s ability to stay the course.”
 

Comments

Growth

Nash Vermont | | Permalink

1.8% is not bad considering the scenario right now but future figures look encouraging.

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