UK economy at ‘dangerous junction’
The UK economy has stalled at a “dangerous junction” according to independent forecaster Ernst & Young, which has slashed growth forecasts for this year and next.
The respected Ernst & Young Item Club has cut its gross domestic product (GDP) forecast to 0.9 per cent this year, down from the 1.4 per cent it predicted three months ago.
It has also slashed growth expectations for 2012, from 2.2 per cent to 1.5 per cent.
Uncertainty across the eurozone and a slowing world economy is undermining business confidence and investment decisions, it said. The Item Club’s decision to cut growth forecasts for the UK follows similar moves by many other institutions, including the International Monetary Fund.
The Item Club also warned the Bank of England’s injection of an additional £75bn of quantitative easing (QE) is unlikely to put the recovery back on track.
The report comes amid a raft of surveys, such as soft manufacturing and services data, which all point toward the UK heading towards a double-dip recession.
It’s worse than we thought. Peter Spencer, Ernst & Young Item Club
Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: “It’s worse than we thought. The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.
“With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track.”
The report predicts that business investment will be flat this year and exports will increase by just 6 per cent, much less than looked likely three months ago.
Read more: Is the economy heading for a double-dip recession?
QE not ‘silver bullet’
The Item Club warned that increased QE would not be the silver bullet to the country’s economic woes.
Mr Spencer said the Bank of England should instead consider cutting already record low interest rates from 0.5 per cent to 0.25 per cent.
“It would provide a boost to borrowers and potentially help to stimulate consumer spending during the difficult months ahead,” he said.
Elsewhere, the Item Club forecasts that the UK’s unemployment rate will increase to 2.7m by the spring of 2013 and called on Chancellor George Osborne to cut employer National Insurance contributions for under-21s.
Mr Spencer said: “With the public sector cuts starting to feed through in the UK, it’s vital that the private sector labour market continues to stay afloat.”
The Item Club also called for a cut to stamp duty in a bid to stimulate the housing market.
Mr Spencer went on: “The housing market is an important driver of the construction industry and consumer spending. Cutting stamp duty, particularly for first time buyers would, in our view, be money well spent.”