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UK economy to continue rough ride in 2012

Wednesday 18th April 2012

Monetary policy may have saved the UK from a double dip, but the economy will stall for the rest of the year, until a more sustainable recovery takes hold in 2013, according to the Ernst & Young ITEM Club.

Emergency measures from the Bank of England, ECB and US Federal Reserve have boosted confidence and stabilised financial markets, pulling the UK back from the brink of recession. But ITEM Club’s spring forecast says it is now up to UK PLC to drive the recovery forwards and prevent any relapses.

ITEM Club forecasts that UK GDP growth will be a dismal 0.4% this year, before rising to 1.5% in 2013 and 2.6% in 2014.

While the wider economy is bumping along, UK corporates remain in good shape and have continued to stockpile cash on their balance sheets at an accelerating pace. The cash balances of private non-financial companies are worth over £754billion, a staggering 50% of GDP, but business investment last year only increased by 1.2%.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said the UK would not begin to prosper until these funds were put back into the economy.

"Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy," he said.

"Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list."

The ITEM forecast shows that even if businesses grow investment by 6% next year and 10% in 2014, that won’t go far enough - the company sector financial surplus is still expected to increase from 5.2% of GDP in 2011 to 5.6% in 2014.

In contrast to big business, households remain under intense pressure. ITEM says that it will become increasingly difficult for private sector companies to create the jobs to offset losses in the public sector, as the austerity programme takes hold in earnest. Unemployment is expected to approach 9.3% of the UK’s total workforce by the middle of next year, with just short of 3 million people out of work, before beginning to fall back.

The additional slack in the labour market will also keep wage growth subdued. Although with inflation expected to be close to its 2% target by the end of the year, driven by falling commodity prices, consumers’ are expected to see a gradual improvement in their levels of disposable income.

Spencer said: "Households remain under the cosh and UK unemployment is set to go even higher by the end of the year. But there is a small glimmer of light at the end of the dole queue. For the first time in years, the gap between wage growth and inflation should start to close, before reversing in 2013. This will feed through to the tills on the high street and will be given an additional boost by the Olympics. But make no mistake; consumers can’t lead this recovery."

ITEM forecasts that disposable income will fall by 0.2% in 2012, while consumer spending will increase by 0.8% before accelerating to 1.1% in 2013 as household incomes gradually strengthen.

However one bit of good news in the ITEM Club’s forecast is the UK’s export performance. Although shipments to the euro zone have been restrained, exports outside of the EU to countries such as the US and China are growing strongly.

Exports of goods increased by 5.1% in volume terms in 2011, while services were up by 3.9%. The UK is expected to put in a similar performance this year, with exports growing by 4.5% and net exports adding 0.3% to GDP.

Spencer said: "With UK consumers still struggling to make ends meet and domestic demand in the doldrums, exports are helping to keep the UK in positive territory. A 0.3% contribution to GDP might not sound a lot, but this will increase as international markets continue to improve.

"However, this remains a major risk to our forecast. The euro time bomb hasn’t been defused, while geopolitical tensions in the Middle East continue to be a cause for concern because of their potential to cause a spike in oil prices. If these crises escalate, UK exports and GDP would be a major casualty.”

He added: "The UK has so far avoided the dreaded double dip, but a lot still hangs in the balance. After three business-friendly Budgets and more tax cuts in the pipeline, it’s now up to corporates to play their part in the UK’s recovery. The business community needs to grasp this opportunity quickly or face the consequences after the next general election."

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Mike Jones

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