Wages and salaries are restrained….
The ITEM Club sees the polarisation between cash-rich companies and indebted households becoming more polarised over the next few years. The national accountants estimate that wages and salaries fell from 46.6% of GDP in 2009 to 45.3% in 2010 and just 45% last year. ITEM sees this share falling further to just 42.4% by 2015. At the same time, the share of non-financial company profits which reached 15.7% of GDP last year pushes up towards a staggering 20%. A modest revival in business spending is not sufficient to neutralise the corporate drag on the economy which keeps growth close to stall speed this year. The non-financial company financial surplus increases from 3.5% of GDP in the last financial year 2011-12 to 5% in 2015-16.

…and households remain under pressure
Households remain under intense pressure in labour and commodity markets. Private sector recruitment is barely able to offset the redundancies seen in the public sector. Average earnings growth remains well below inflation, which is being held up by rising petrol prices. The latest industrial surveys show that the rise in energy and raw materials costs has been absorbed by margins. But this is now likely to feed through to consumer prices, reinforcing the pressure on household finances and further delaying prospects of a consumer recovery.

Coupled with this, activity in the housing market is falling back now that the stamp duty holiday for first-time buyers has ended. Moreover, the Bank of England’s latest Credit Conditions Survey is signalling a major tightening of credit standards, particularly for mortgage borrowers. Profit margins on mortgage lending have already widened and are projected to increase further over the next 3 months. This reflects the tightening of credit in the Eurozone as banks reduce their loan books in order to meet the more stringent regulatory capital requirements imposed last December.

In the face of these pressures, the forecast sees real household disposable income marking time this year after falling back in 2010 and 2011. Consumer spending increases by 0.8% this year as the saving ratio eases back. This accelerates to 2.2% by 2015, helped by a modest revival in real earnings growth. Turnover in the housing market dips after the strong start to this year, but begins to recover next year as the first-time buyer and credit shortages begin to ease. House price inflation is also likely to resume on this timescale.

Business investment starts to recover next year…
The forecast shows business investment increasing by just 1.2% this year, but it starts to pick up more convincingly next year, with growth of 6%, followed by nearly 10% in 2014. Capital spending in the public sector is falling back sharply now, and even with housing investment picking up, economy-wide investment falls back again this year. It grows by 4.1% next year before accelerating to 7.8% in 2014.

…and exports make an important contribution
Export markets are a big challenge for UK businesses at the moment. Shipments to Europe have inevitably been restrained by the problems in the Eurozone, yet shipments to non-European destinations have been performing well. Exports of goods increased by 5.1% last year in volume terms and exports of services were up by 3.9%. ITEM expects exports to grow by 4.5% this year and imports by 3.5%, but over the remaining years of the forecast export growth moves ahead of import growth more convincingly.