UK economy to see return to growth, says Item Club

Shop window with sale sign High street spending should increase as inflation falls

The UK economy should enjoy an "Indian summer" after a poor first half of the year, says a leading forecaster.

Falling inflation and a pick-up in consumer spending will help the UK return to growth in the second half of the year, the Ernst & Young Item Club says in its latest quarterly forecast.

It expects the inflation rate to fall to 1.7% by the end of the year, but overall growth for 2012 to remain flat.

The economy will grow by 1.6% in 2013 and 2.6% in 2014, it says.

Peter Spencer, chief economic adviser to the Item Club, said: "Spiralling inflation has cut real wages by 7.5% over the last four years, but the squeeze is almost over.

"Inflation is now coming back to heel, helped by the chancellor's decision to postpone the increase in fuel duty, falling energy and commodity prices, plus tax changes dropping out of the calculation."

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As a result, real disposable incomes are forecast to increase by 0.4% in 2012, and by 1.5% in 2013.

But despite the expected slight improvement in consumer spending, most people will be focusing on paying down debt, he says, meaning the UK economy will have to boost its exports to return to sustainable growth.

The unemployment rate could still hit 8.6% by the end of the year, the report says, and peak at 8.7% in 2013.

But as the eurozone gradually gets to grips with the debt crisis, business confidence should return, it says. The Item Club is forecasting business spending to grow by 3.4% in 2012, but says it is unlikely to return to pre-recession levels until 2015.

"The prospect of a durable UK recovery remains heavily dependent upon confidence in financial and business communities," says Mr Spencer, "and it is going to take time to re-build.

"However, a resolution of uncertainty about the euro could transform the outlook, pushing company spending up much faster than forecast."

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