E&Y Item Club cuts UK economic outlook
2012-10-15 11:21:44
The British economy is likely to contract this year amid "deeply disappointing' trade figures, while consumer demand will bounce back stronger than expected, a report from Ernst & Young ITEM Club revealed Monday.
According to the Item Club's autumn forecast, the gross domestic product is expected to fall 0.2 percent this year, before increasing to 1.2 percent in 2013 and 2.4 percent in 2014.
This prediction is gloomier than in the July report, which forecast a zero growth for 2012 and 1.6 percent expansion in 2013.
'Deeply disappointing' trade figures have stifled growth over the last six months but falling inflation and rising employment levels have seen consumer demand bounce back stronger than expected, the latest forecast said.
Net trade is expected to subtract 0.6 percent from GDP this year, before positively contributing to growth in 2013. In contrast, disposable incomes are forecast to increase by 1 percent this year and 1.4 percent in 2013, which feeds through to consumer spending growth of 0.6 percent and 0.8 percent respectively.
These trends will continue to gather pace next year, supported by a resurgence of the housing market, it added. At the same time, banking lending has started to loosen up and the housing market is primed for a recovery early next year, the report pointed out.
Meanwhile, the report says that the late growth spurt in the second half of the year may not be enough to enable to meet the Office for Budget Responsibility's (OBR) deficit forecast of GBP 95 billion for 2012-13.
Item Club expects both the Public Sector Current Budget and Public Sector Net Borrowing to overshoot the target by around GBP 8 billion.
"Public finances have been hit with a pincer movement of higher spending and lower tax receipts, which is causing the UK to slip against the OBR's deficit forecast," said Peter Spencer, chief economic advisor to ITEM Club.
"We think this is largely cyclical but the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the election if the Chancellor is to meet his fiscal targets." Consumers may be propping up a weak recovery this year but the move towards balanced growth over the medium term hangs critically upon a recovery in world markets, Spencer said. "A lot still hangs in the balance and risks dominate the outlook."