The UK economy will stall until the end of the year but a more sustainable recovery will begin in 2013, economists are predicting.
The spring forecast from Ernst & Young’s Item Club puts total growth at just 0.4% for 2012, before rising to 1.5% in 2013 and 2.6% in 2014.
It noted that emergency measures from the Bank of England, European Central Bank and US Federal Reserve had boosted confidence and pulled the UK back from the brink of recession, but added there was little more that monetary policy could do. ‘It is now up to UK Plc to drive the recovery forwards.’
The spring forecast also said that UK corporations were stockpiling cash at an ‘accelerating pace’. The cash balances of private non-financial companies are worth over £754bn, equivalent to 50% of gross domestic product. Meanwhile, business investment has increased by only 1.2%.
Peter Spencer, chief economic adviser to the Item Club, contrasted the risk-averse climate of the UK to that in the US where business investment had ‘picked up nicely’.
He added: ‘Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.’
‘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.’
Households will continue to feel the pressure, according to the forecast. Unemployment is expected to approach 9.3% of the UK’s total workforce by the middle of next year – just short of 3 million.
It will also become increasingly difficult for private companies to create jobs to offset losses in the public sector as the austerity programme intensifies. Wage growth will also be subdued, although consumers are likely to see some improvement in their disposable income with inflation expected to fall to its 2% target by the end of this year.
One piece of good news in the Item Club’s forecast is the UK’s export performance. Exports to countries outside of the European Union, including the US and China, are growing strongly.
However, the volatile international outlook poses a major risk to exports, Spencer warned.
He said: ‘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.’
