However, following a surprisingly strong first half of the year, the UK is heading for a ‘soft patch’ over the winter as the pace of recovery loses momentum.
Domestic and overseas markets have recovered nicely and the Ernst & Young ITEM Club predicts GDP growth of 1.4% this year and 2.2% in 2011. However, ITEM cautions that the outlook remains very uncertain, with opinion divided over the future prospects for the UK economy.
With businesses and consumers preparing for the government’s five year fiscal deficit reduction programme and further evidence that exports are levelling off due to a decline in global demand, it’s hardly surprising that the MPC is wrestling over the prospect of a second round of quantitative easing.
Yet despite the obvious tensions within the economy, ITEM says that the concerns which have arisen on the risks of the UK economy overheating, or suffering a bout of deflation, have been exaggerated. ITEM predicts that CPI inflation will move below target from January 2012 as the VAT increase finally drops out of annual calculations, and holds firm on its view that interest rates will not go up again until 2014.
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said, “The economy is likely to slow over the winter following a surprisingly positive first half of the year, but I think this will be a soft-patch, not a double-dip.”
“There are many forces weighing on the UK economy. Evidence is mounting that global demand is slowing, while the health of the banking system and its ability to support the recovery still remains in doubt. Household spending – despite showing some resilience this summer – is likely to buckle under the unrelenting pressure on disposable incomes, with credit remaining tight and the housing market now double-dipping.”
The forecast is based on the assumption that one way or another the coalition’s ambitious spending reductions will be achieved. Spencer says that publication of the Comprehensive Spending Review (CSR) should help to reduce uncertainty and stimulate business investment, which is forecast to increase by 1.8% this year and accelerate to 9.0% in 2011.
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