UK economy will return to growth in second half, says ITEM Club

Bank of England

The UK economy will show a return to growth in the second half of this year, a report from the Ernst & Young ITEM Club said today.

Growth is expected to be fairly slow, however, and over the whole of the year GDP is expected to be down on last year.

The ITEM Club predicts that GDP for 2012 will be 0.2% lower than in 2011. The weak performance of the economy was blamed on the UK’s “deeply disappointing” trade performance in the first half of the year, which offset the positive effect on consumption of falling inflation and rising employment.

Next year GDP is predicted to grow by 1.2%, followed by 2.4% growth in 2014 and 2015, with the positive consumer trends seen in recent months being reinforced by a recovery in the mortgage and housing markets from next spring.

The ITEM Club noted, however, that the return to balanced growth over the medium term depends on a recovery in world markets.

Even if the US negotiates the fiscal cliff with a political deal and policymakers in the eurozone do what it takes to save the single currency, these markets will be held back by fiscal retrenchment. Moreover, prospects for the rapid growth markets are less bright than they seemed last year, the forecasting group believes.

Within the domestic economy, there are signs that it is becoming easier for households and businesses in the UK to borrow. The recently launched Funding for Lending Scheme from the Bank of England and the Treasury will reinforce the effect of the revival of the UK mortgage-backed securities market seen in recent weeks, the quarterly report added.

Reflecting on the strength of the labour market despite the recession, the ITEM Club said that many employers have taken the view that the decrease in demand for products is temporary have therefore decided to hold on to skilled workers. Meanwhile some industries, like car manufacturing, have benefited from strong demand over the last two years and have been expanding their capacity and recruiting more staff.

Looking ahead, the report stated that the outlook for the high street and the housing market is continuing to improve, while businesses should benefit from the increasing availability of cheap funding for banks, which is likely to stimulate their appetite for asset-backed business loans.

On the down side, export-led growth is becoming much harder to find because the UK is just one of many countries forced into this strategy. It’s essential for businesses to know where their competitive advantage lies and to focus on the areas with the best chance of creating value.

The government and the business community need to work together if the UK is to change its performance in export markets to any significant extent, the ITEM Club concluded.

 

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