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Monday, the Ernst & Young ITEM Club doubled the British economic growth outlook for 2010 from its earlier forecast. However, the influential think tank forecasts an uncertain recovery in the second half of this year, followed by a weak performance in 2010.
The economy is set to grow 1% next year, following a fall of 4.5% in 2009, the group's latest report said. In July, it was estimated that the economy would shrink 4.4% in 2009 and grow 0.5% growth next year. Although the recession is ending, the UK is in for an anaemic recovery as output scrapes along the bottom over the next eighteen months, the ITEM Club said in its autumn economic outlook report.
Peter Spencer, chief economist at the ITEM Club said it is going to be a bumpy ride as people would bring forward purchases to avoid the increase in VAT on January 1 to 17.5% from 15%. Further, the stamp duty holiday on housing is set to come to an end by 2010. With consumers repaying debt and fiscal policy inevitably tightening in the UK after the election, it is difficult to see any serious potential for a sustained recovery in domestic demand, said Spencer.
The forecasting group sees a gradual restructuring of the economy based on global recovery and a further depreciation of the exchange rate in the subsequent years. The weakness of domestic demand added downward pressure on consumer prices, but this is offset by downward pressure on the exchange rate, helping to rebalance the economy in subsequent years.
As consumers try to rebuild their savings amid weak earnings growth, spending is forecast to drop 3% in 2009. The saving ratio is estimated to average 5.8%, up from 1.7% during last year's squeeze. In subsequent years, the saving rate would stay around 7% and the growth in real earnings and spending will remain subdued, the report said.
The pressure on disposable incomes is reinforced by the persistent weakness of the housing market, the ITEM Club said. A recovery in mortgage activity and first-time buying is needed to restore the market to normality.
Recent developments in the financial markets and the economic stabilization over the last six months underpinned marked improvement in the business outlook. The number of profit warnings dropped dramatically indicating that the worst is over, the group pointed out.
The ITEM Club noted that the quantitative easing measures adopted by the Bank of England helped to revive the capital markets. Companies and consumers used the cash generated by the scheme and low interest rates to pay down debt rather than to spend.
In an interview, Bank of England's policy maker Adam Posen told Sunday Times that he supports an extension of the quantitative easing programme beyond the GBP 175 billion level. Posen said "Now we are back to coping with a normal recession. It is pretty severe but we are five quarters in and it looks like we are bottoming out."
The UK GDP had showed a 0.6% shrinkage during the second quarter and 5.5% drop annually. The annual fall was the biggest since records began in 1955. The Office for National Statistics is slated to issue preliminary estimate for the third quarter GDP on October 23.
According to the quarterly economic survey conducted by the British Chambers of Commerce, the decline in British economic activity is coming to an end. The economy is on the brink of leaving recession, the lobby said.
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