UK economy will stall until 2013, says Item Club
- 16 April 2012
- From the section Business
The UK may have avoided a double-dip recession, but the economy will stall for the rest of the year, an independent forecasting group has said.
The Bank of England's monetary policy measures have boosted confidence, but now big business needs to fuel growth, the Ernst & Young Item Club said.
It says UK companies have stockpiled cash on their balance sheets and now need to increase investment.
It forecasts "dismal" growth of 0.4% this year, rising to 1.5% in 2013.
The independent Office for Budget Responsibility, which provides forecasts for the government, expects the economy to grow by 0.8% in 2012 and by 2% in 2013.
The Bank of England has increased its quantitative easing programme - aimed to boost the economy by buying bonds - to £325bn this year, and has continued to hold interest rates at a record low of 0.5%.
But Prof Peter Spencer, chief economic adviser to the Item Club, told the BBC there was only so much central banks could do.
"The problem is that they can keep us away from disinflation and depression but they can't really pump any more in than that for fear of inflation."
The Item Club said that "while the wider economy is bumping along, UK corporates remain in good shape and have continued to stockpile cash on their balance sheets at an accelerating pace".
"Business investment has picked up nicely in the US, but UK companies remain extremely risk-averse, which is sapping strength from the economy," said Prof Spencer.
"Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list."
On a global scale, the Item Club pointed to China and Germany as having cash and not spending it and said that this too needed to change.
In contrast to big business, the Item Club said UK households remained under intense pressure as the government's austerity programme took hold.
It expects the unemployment rate - currently at 8.4% - to approach 9.3% by the middle of next year, with the number of people out of work rising to almost three million before beginning to fall back.
However, it highlighted the UK's export performance as one piece of good news for the economy, after exports of goods increased in volume by 5.1% in 2011.
Last week, the Office for National Statistics said that exports of goods fell 3.4% in February this year, although monthly data is often volatile. January's data had shown a strong rise in exports.