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UK recovery in state of paralysis, says Ernst & Young ITEM Club forecast
Political uncertainty in the Eurozone has paralysed the UK recovery, according to the latest quarterly forecast from the Ernst & Young ITEM Club, with UK GDP expected to flatline for the rest of year
ITEM Club’s winter forecast says that deteriorating levels of confidence will see business investment stagnate in 2012, while export prospects have already slowed. According to the report, the UK is probably already in a technical recession and will struggle to reach positive growth until 2013.
The report forecasts UK GDP of 0.2% this year before increasing to 1.8% in 2013 and 2.8% in 2014.
UK back in recession
Professor Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club explains: “Figures for the last quarter of 2011 and the first quarter of this year are likely to show that we are back in recession and 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 plcs have strong balance sheets and have built up large cash stockpiles, which will provide a useful insurance policy if the situation deteriorates further. Business spending has already been cut back heavily. However, with business confidence faltering, investment and recruitment are likely to remain on hold until stability returns.“
ITEM Club forecasts that investment fell by 2.6% in 2011 and will grow by just 0.4% in 2012.
Unemployment will approach three million
The labour market outlook also remains bleak. According to the report, sluggish levels of private sector recruitment will be unable to offset job losses in the public sector. ITEM says that unemployment will be just shy of the three million mark in the first half of 2013, representing 9.3% of the UK’s labour force.
ITEM says that disposable incomes will decline by 0.8% this year, while consumer spending will remain flat before picking up by 1.4% in 2013 as employment prospects brighten and inflation remains low.
Exports still hold the key to UK’s recovery
According to the report, the UK’s recovery is still heavily dependent on exports. Exports accounted for most of last year’s growth, adding 0.9 percentage points to GDP in 2011, but with weakening demand from the Eurozone and concerns over China’s ability to soft land their economy, the outlook for 2012 looks much less promising.
ITEM is predicting export growth of 3% this year, which will add 0.4 percentage points to UK GDP. But this will be dependent on the UK’s ability to continue to re-orient exports away from the Eurozone to the rapid growth markets, such as India and Indonesia.
Martin Cook, commercial managing partner at Ernst & Young, comments: “Many UK companies rely heavily on their Eurozone trading partners but this is no time for ’business as usual’; they will need to adapt, assess their long-term business models and be prepared to tap into new markets.
“Corporates need to start planning for different scenarios, as no-one really knows how the Eurozone crisis is going to play out. Doing nothing is simply not an option.“
But significant risks remain
Spencer concludes: “There’s a lot hanging in the balance. Our forecast is based on the assumption that the Euro remains intact and that policymakers are able to contain the Eurozone crisis. However, the longer the uncertainty continues, the more debilitating the impact will be on the UK’s economic prospects.“
• The ITEM Club is the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP.
Julian Gray, ITEM Club sponsor for Ernst & Young in the south, said: “In the south, retail and aerospace and defence are two sectors which have difficult months ahead. Consumer confidence remains low across the region and with consumers expecting their disposable income to drop during 2012 it is unlikely that we will see footfall increase in the region’s high streets.
“The aerospace and defence sector is also facing challenges in the region with government spending cuts and a reduction in spend by the US having an impact on some of the larger corporates in the south.
“While the economy in the UK is fragile, businesses in the region should be building strategies to reach out to new customers in the emerging markets in order to find growth.“
Details:
Julian Gray Senior partner for Southampton 023-8038-2100
Neil Hutt Senior partner for Reading 0118-9281599
www.ey.com/uk
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – FEBRUARY 2012
www.businessmag.co.uk
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