UK economy will remain sub-par over European sovereign debt crisis

According to the latest Ernst & Young ITEM Club report, out the other today, growth in the UK economy will remain sub-par as concerns grow over the European sovereign debt crisis and persistent uncertainty amongst Euro businesses remain.

While it has been noted that the current level of world trade has just now surpassed 2008 peaks, and that UK exports are back to pre-recessionary levels, (albeit boosted by the devalued pound), the lack of a resolution to the Euro sovereign debt crisis and constant Double-Dip fears has caused many businesses to hold back on investment.

UK growth downgraded to just 1.4% in 2011

As a result the ITEM Club has downgraded its GDP forecast for the UK to 1.4% in 2011, 2.2% in 2012 (down 0.1%) and then moving up to 2.5% in 2013.

Commenting on the risk factors Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said: “The UK economy has hit a critical juncture. The risks to the world economy and the Eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy. Need I elaborate?”

UK consumers plunged back into recession

When looking across at the rest of the economy the situation seems to remain pretty dismal for most UK consumers who, according to the official statistics, have been plunged back into recession.

The continuing squeeze on household incomes has become so severe that household savings have fallen at the same time that spending has declined. ITEM believes that in the short term this situation could get worse when the full effects of April’s increase in employees’ National Insurance Contributions are felt.

With inflation set to remain at above 4% this year and earnings growth further subdued, ITEM sees real household disposable incomes falling by 1.4% this year. This follows a past decline of 0.8% in 2010 and the net result is that this is the first back-to-back declines in household income since 1976. Interesting when you consider that in Alistair Darling’s new book, he claims that the Prime Minister in 2008, Gordon Brown, thought the crisis would be done and dusted within six months?

Longest 6 months of our lives. However, despite the signs still not pointing to an immediate reprieve, I Ernst & Young ITEM Club’s Peter Spencer concluded that he remains optimistic about the future growth outlook for the UK economy, but that in the short term it will be somewhat fragile.

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