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ITEM Club slashes GDP forecast

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18th Jul 2011
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UK growth is “set to disappoint” this year as world economic woes create uncertainty for future business investment, according to the Ernst & Young ITEM Club summer 2011 forecast.

The gloomy outlook comes ahead of the publication this week of minutes from the Bank of England's latest Monetary Policy Committee meeting and is expected to strengthen views that a rise in interest rates is some way off.

The economic forecasting group warns that growth will remain lower than expected as growing global concerns and the European sovereign debt crisis intensifies.

Accordingly, it downgraded its GDP forecast to 1.4% in 2011 (down from 1.8% it forecast in April), 2.2% in 2012 (down 0.1%) moving up to 2.5% in 2013.

ITEM Club chief economic adviser Peter Spencer said: “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?

Item said it was predicting a rise in business investment of 8% this year and by 12% in 2012, but said those levels were well below target. “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 added.

The GDP downgrade comes at a time of uncertainty among the business and investment community. Spencer added it’s not about the cash so much, but more 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.”

The long-term analysis was however, more upbeat for business: "Corporate balance sheets are healthy and exports should pick up again quite quickly once current uncertainties in Europe are resolved" said Spencer.

Spencer also said that talk about a “Plan B” for the recovery seems premature given the mixed signals in the official data: “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”

The report also predicts that house prices will continue to fall into next year, down 6% from their 2010 peaks. Prices remain weak, exacerbated by subdued demand and a continued lack of credit.

It also shows consumer spending falling by 0.4% this year - adding further bad news for the high streets.

Visit the Ernst & Young website to view the full report.

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