ITEM Club says UK lacks vision of US to create economic growth

Monday, 21 January 2013 09:47

By

A new report from Ernst & Young’s ITEM Club warns that the UK economic recovery will be dominated by a “low-growth landscape” with the prospect of a durable recovery “dependent on confidence in financial and business communities.”

The ITEM Club Winter 2013 UK forecast says that exports should not be such a drag on growth in 2013 as the United States is in a good position to withstand the tax increases and spending cuts required to reduce its deficit as required by the decisions relating to the US fiscal cliff and markets in the eurozone are stabilizing meaning that overseas trade should have a neutral effect on the UK after subtracting 0.8 per cent from UK GDP last year.

The report suggests that the UK economy will grow by 0.9 per cent in 2013, by 1.9 per cent in 2014 and by 2.5 per cent in 2015.

It is published at the start of the week when the first official estimate of GDP in the final quarter is being published by the Office for National Statistics (ONS). It is expected to show a 0.2 per cent contraction which would mean economic activity did not grow or subtract at all in 2012.

With snow disrupting economic activity this month, growth prospects for the first quarter of 2013 have diminished raising the prospect of the UK heading into a triple-dip recession.

However, the report calls on the government to do more if the UK is to decisively pull out of its economic hole. It needs to increase infrastructure spending and this coupled with a boost to the housing market would stimulate growth.

The good start to 2013 made by the financial markets that has seen the FTSE 100 rise to its highest level since 2008 is another factor that could see growth rise by more than forecast if it encourages more company spending.

It says that the UK government lacks vision to create the policies that would help the economy grow quicker, allowing other countries like the United States to emerge from the worst economic downturn since the Great Depression of the 1930’s with more vigour.

The report says that monetary policy in the US led by the Federal Reserve “has been much more innovative than the Bank of England in dealing with the financial crisis and supporting economic activity.”

Peter Spencer, chief economic advisor to ITEM said: “The UK has crawled out of recession but the government’s mid-term report card should read 'could do better’.

“Innovative policies from the Federal Reserve have helped to put the US economy in a stronger position to withstand tax increases and spending cuts. A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth.”

The ITEM Club said that consumer spending in the UK began to recover in 2012 as inflation fell and employment rose. However, although it expects this trend to continue in 2013, albeit to a lesser degree as the jobs market loses some of its impetus, the report says that consumers cannot be expected to drive the recovery.

ITEM Club said that mortgage lenders are in a good position to support a “slow revival in the housing market” that should bring higher house prices and economic growth.

The report says that weak GDP figures are at odds with other economic indicators such as employment levels that suggest the economy is actually growing. However, the report puts this down to the flexibility of the labour market in this recession which has seen employers hold onto skilled workers or move people onto part-time hours.

The ITEM Club welcomed the appointment of the new Governor of the Bank of England, Mark Carney who begins his term in July describing it as an “opportunity for change” and a chance to change the monetary policy emphasis from inflation targeting which is “long past its sell-by date”.

Comments Bubble Comments

Twitter: My Finances


Join the conversation at #news_myfinances


Newsletter sign up

Interests

In addition to the weekly newsletter, which areas of finance would you like to hear from us about:

Tick this box if you would like us to send you promotions from carefully selected third parties.

By signing-up you agree to the terms of use and privacy policy.

sign-up button

Get the latest information on: