Economy seen to quit recession this year

Posted on July 16, 2012

The economy will turn from double-dip recession into “Indian summer”, a private sector economic forecasting group predicts.

The upbeat assessment of the Ernst & Young Item Club report, published on Monday, contrasts with a recent ratcheting down of expectations by forecasters.

    Sir Mervyn King, governor of the Bank of England, told the Treasury select committee three weeks ago the outlook had deteriorated “markedly” since the BoE’s May inflation report.

    Internationally, too, pessimism has strengthened. Christine Lagarde, managing director of the International Monetary Fund, has warned that the IMF is about to trim its global growth forecasts.

    In contrast, the Item Club suggests that the UK economy may have turned the corner and households may have the worst behind them. “Spiralling inflation has cut real wages by 7.5 per cent over the last four years, but the squeeze is almost over,” said Peter Spencer, chief economic adviser to the Item Club.

    “The boost to household finances and the subsequent pick-up in spending should be enough to push the UK back into positive territory this year.”

    But consumers would not sustain the recovery, he added. The Club expects business spending and net exports to add more to economic growth, forecast at zero this year, rising to 1.6 per cent next year and 2.6 per cent in 2014 and 2015.

    The forecaster credits both the eurozone and UK policy makers for measures to lift business confidence.

    “It is just possible that the EU summit in June, together with the tough new fiscal rules agreed in December, have laid the foundations for a gradual revival of business confidence,” Mr Spencer said. “The Treasury’s ‘funding for lending scheme’ also looks promising”.

    The prediction will please the government, whose austerity programme is premised on private businesses picking up the slack from retrenching consumer and government spending.

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