UK in recession, says economic think-tank

16 Jan 12
The UK economy is likely to have shrunk in the last quarter of 2011, and might be in recession until the summer, a leading economic forecaster has said.
By Richard Johnstone | 13 January 2012

The UK economy is likely to have shrunk in the last quarter of 2011, and might be in recession until the summer, a leading economic forecaster has said.

The Ernst & Young Item Club, which uses the Treasury’s own model to predict the state of the UK economy, said that growth will ‘flatline’ in the year ahead.

Its winter forecast, published today, has said that the political uncertainty around the fate of the eurozone has paralysed the UK recovery, with unemployment set to reach 3 million next year.

Economic growth in 2012 will be only 0.2%, before increasing to 1.8% in 2013 and 2.8% in 2014, the forecast predicted.

Peter Spencer, chief economic adviser to the Item Club, said that figures for the last quarter of 2011 and the first quarter of this year are likely to show that the UK is back in recession.

He added: ‘We are going to have to wait until this summer before there are any signs of improvement. But it’s not going to be a repeat of 2009, we are not going to see a serious double dip.

‘This time around, UK public limited companies have strong balance sheets and have built up large cash stockpiles, which will provide a useful insurance policy if the situation deteriorates further.’

The economic situation will mean that ‘sluggish’ levels of private sector recruitment will be unable to offset job losses in the public sector.

The Office for Budget Responsibility increased its forecast of the likely loss of public sector jobs from 400,000 to 710,000 between April 2011 and 2017, according to the Autumn Statement.

This will lead to more than 9% unemployment, peaking in the first half of 2013, the Item Club predicted.

Spencer added: ‘We are expecting to see another 300,000 unemployed this year, which is relatively modest when compared to the increase in 2009, but this is adding to an already lengthy dole queue.’

He also warned that there was ‘a lot hanging in the balance’. The forecast is based on the assumption that the euro remains intact, with the crisis over borrowing costs for countries, including Italy and Greece, being contained by the single currency’s member states.

Speaking after the ratings agency Standard and Poor’s downgraded the credit ratings of nine eurozone countries late last week, including France, Spencer said: ‘The longer the uncertainty continues, the more debilitating the impact will be on the UK’s economic prospects.’

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