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UK growth will be half the official estimates in 2012

Ernst & Young's Item Club claims Britain will "stall until 2013".

The UK’s GDP growth will be a “dismal” 0.4 per cent in 2012 – half the Office for Budget Responsibility’s estimate of 0.8 per cent – according to a new report from Ernst & Young’s Item Club.

Peter Spencer, the Item Club’s chief economic adviser, says that though the UK has so far avoided the double-dip, “a lot still hangs in the balance”. 

Emergency measures from the Bank of England, the European Central Bank and the US Federal Reserve have boosted confidence and stabilised financial markets but the British economy is likely to stall until 2013. Those in the corporate sector, however, have been rapidly stockpiling wealth – according to the new forecasts, cash balances of private non-financial companies are worth over £754bn, which amounts to 50 per cent of GDP. In spite of this, in 2011, business investment only rose by 1.2 per cent.

Spencer argues: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy. Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”

The report shows that even if businesses grow investment by 6 per cent in 2013 and 10 per cent in 2014, this won’t be enough – the company sector financial surplus is still expected to increase from 5.2 per cent of GDP in 2011 to 5.6 per cent in 2014.

Unemployment is set to be 9.3 per cent of the UK workforce by mid-2013, with just short of three million people out of work, before beginning to fall back. The additional slack in the labour market will also keep wage growth subdued.

However, with inflation expected to be close to its 2 per cent target by the end of 2012, driven by falling commodity prices, consumers are expected to see a gradual improvement in their levels of disposable income.

Yet Spencer warns: “Make no mistake, consumers can’t lead this recovery.”

The Item Club forecasts that disposable income will fall by 0.2 per cent this year, while consumer spending will increase by 0.8 per cent before accelerating to 1.1 per cent in 2013 as household incomes gradually strengthen.

In 2012, exports of goods in the UK are expected to be 4.5 per cent in volume terms with net exports adding 0.3 per cent to GDP. Although shipments to the eurozone have been restrained, exports outside of the EU to countries such as the US and China are experiencing strong growth.

Spencer concludes: 

With UK consumers still struggling to make ends meet and domestic demand in the doldrums, exports are helping to keep the UK in positive territory. A 0.3 per cent contribution to GDP might not sound a lot, but this will increase as international markets continue to improve.

However, this remains a major risk to our forecast. The Euro time bomb hasn’t been de-fused, 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.

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.