Latest Ernst & Young ITEM Club forecast launched today

The ITEM Club’s chief economic adviser, Peter Spencer, has revealed that UK growth is set to disappoint this year as world economic woes create deep uncertainty for future business investment

Here’s the official ITEM Club release:

"Growth in the UK economy will remain sub-par, as growing global concerns and the European sovereign debt crisis increase uncertainty amongst the business and investment community, according to the latest Ernst & Young ITEM Club report, out today.

While world trade has now surpassed 2008 peaks and UK exports are back to pre-recessionary levels, boosted by the devalued pound, the lack of a resolution to the sovereign debt crisis has caused many businesses to hold back on investment.

If there is a soft landing in China, the Greek crisis is resolved and nothing else goes wrong in the world economy, then world output growth should manage another 4% this year – but it’s a big if.

UK growth downgraded to just 1.4% in 2011

As a result the ITEM Club has downgraded its GDP forecast for the UK to 1.4% in 2011 (down from the 1.8% it forecast in April), 2.2% in 2012 (down 0.1%) moving up to 2.5% in 2013.

Commenting on the risk factors Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, says: “The UK economy has hit a critical juncture. The risks to the world economy and the Eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy. Need I elaborate?

“We are still expecting business investment to grow by 8% this year and 12% in 2012, however this is still well below its peak. The uncertainty about Greece and the EU periphery will continue to act as a damper on business investment in the UK, long held up as one of the torches that would light the way to recovery."

Spencer adds, “It’s certainly not about the cash, it’s about the commitment – investors and the business community are lacking the confidence to commit to investment. The longer the soft patch extends the greater the risk of relapse in the UK labour market will become. But if confidence in the world economy grows this threat will quickly recede.”

Cushioning the blow

This is just one of a number of automatic stabilisers that are hard at work in the UK, according to Spencer – from tax to employment benefits, monetary policy and lower commodity prices – helping to cushion the blow to UK growth even if some of the greater downside risks do materialise. It is these stabilisers that relieve ITEM’s worst fears about the prospects for UK economic growth.

Mixed data signals

As other commentators have remarked, there are some question marks over the reliability of official economic data, with some odd movements and apparent inconsistencies in both output and expenditure, further distorted by winter weather, Fukishima, and the Royal wedding. ITEM believes that official figures underestimate the underlying strength of the UK economy.

Too early to talk of plan B or QE

Given the mixed signals in the official data, the allowance for economic weakness in the government’s fiscal plans and the fact that the economic stabilisers are strong enough to cushion the effects of weaknesses in the economy, Spencer says that talk about a Plan B for the recovery certainly seems premature.  “Even if some of the risks were to materialise, the impact on exports would be balanced by the benefits of lower commodity prices.  The risk of an increase in base rates would recede further in this eventuality”, he comments.

UK consumer plunged back into recession

Looking across the rest of the economy the situation remains pretty dismal for most consumers who, according to official statistics, have been plunged back into recession. The squeeze on incomes has become so severe that household saving has fallen at the same time as spending has declined. ITEM believes that in the short term this situation could get worse when the full effects of April’s increase in employees’ National Insurance Contributions are felt. With inflation set to remain at above 4% this year and earnings growth subdued, ITEM sees real household disposable incomes falling by 1.4% this year, following a decline of 0.8% in 2010 – the first back-to-back declines in household income since 1976. The forecast also shows consumer spending falling by 0.4% this year – further bad news, if more was needed, for the UK’s high streets.

Although the cost of long-term mortgage deals has fallen the housing market has at best moved sideways. Prices remain weak, exacerbated by subdued demand and a continued lack of credit. Therefore ITEM predicts that house prices will continue to fall well into next year, down almost 6% from their 2010 peaks.

Bright prospects for business once the gloom dispels

Spencer concludes, “We are optimistic about the future growth outlook, but the economy remains fragile, with worries now emerging about the key drivers for UK growth – exports and investment. However, corporate balance sheets are healthy and exports should pick up again quite quickly once current uncertainties in Europe are resolved.”

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