Consumers’ spending power comes to the rescue, as UK recovery takes hold in second half of the year

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London 15 October 2012: The UK will return to growth in the second half of the year, saved by consumers’ spending power and a revival on the high street after exports continue to disappoint, according to the latest economic forecast from the EY ITEM Club.

ITEM Club’s autumn forecast says that ‘deeply disappointing’ trade figures have stifled growth over the last six months but falling inflation and rising employment levels have seen consumer demand bounce back stronger than expected. ITEM says these trends will continue to gather pace next year, supported by a resurgence of the housing market.

According to the report GDP will stutter to -0.2% this year overall, before increasing to 1.2% in 2013 and 2.4% in 2014.

Consumer spending props up a weak recovery

Peter Spencer, chief economic advisor to the EY ITEM Club, comments: “With exports being battered by the Eurozone crisis and a weakening economic outlook in markets such as the US, India and China, the UK is relying heavily on the high street to come to the rescue this year.

“The fundamentals are in place to enable this to happen. Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival. But it’s not the balanced, long term sustainable growth we were hoping for.”

ITEM Club says net trade is actually expected to subtract 0.6% from GDP this year, before positively contributing to growth in 2013. In contrast, disposable incomes are forecast to increase by 1% this year and 1.4% in 2013, which feeds through to consumer spending growth of 0.6% and 0.8% respectively.

Laying the foundations for a housing market revival

According to the report, an improving outlook for consumers combined with easing credit conditions are also laying the foundations for a recovery in the housing market. ITEM Club expects housing transactions to bottom out this autumn, before recovering in earnest in spring next year, with house prices set to follow.

Spencer explains: “The latest credit conditions survey shows that one of the biggest headwinds facing the UK has now begun to ease – lending has started to loosen up and we’re hopeful that the housing market is primed for a recovery early next year. There are though plenty of ‘ifs’ and ‘buts’. The big question is the extent to which consumers will choose to grasp the opportunity or continue to deleverage and to pay down their debts.”

But Chancellor will miss OBR’s deficit reduction targets

That’s where the good news ends. The ITEM Club report says that the UK’s late growth spurt in the second half of the year is unlikely to be enough to enable to the Government to meet the Office for Budget Responsibility’s (OBR) deficit forecast of £95bn for 2012/13.

ITEM Club expects both the Public Sector Current Budget (PSCBX) and Public Sector Net Borrowing (PSNBX) to overshoot by around £8bn.

Spencer comments: “Public finances have been hit with a pincer movement of higher spending and lower tax receipts, which is causing the UK to slip against the OBR’s deficit forecast. We think this is largely cyclical but the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the election if the Chancellor is to meet his fiscal targets.”

Risks dominate the outlook
Concluding Spencer says: “Consumers may be propping up a weak recovery this year but the move towards balanced growth over the medium term hangs critically upon a recovery in world markets.

“However, even if the US negotiates the impending fiscal cliff and Euro policymakers actually do what it takes to save the single currency, these markets will still be held back by austerity and retrenchment. A lot still hangs in the balance and risks dominate the outlook.”