The economy is set to return to growth in the next six months, boosted by falling inflation and a pick-up in consumer spending, according to new forecasts from Ernst & Young.
The company’s latest quarterly ITEM Club forecast found that the inflationary pressures that have been reducing household incomes are now easing much quicker than expected. Providing that commodity prices remain subdued, ITEM Club said inflation should hit 1.7% by the end of the year, giving consumers extra cash in their pockets to spend on the high street.
The report predicts zeros GDP growth in 2012 as a whole. It predicts that longer term, sustainable growth remains dependent on an improvement in the UK’s export performance and business investment, with growth of 1.6% forecast in 2013 and 2.6% in 2014.
According to the report, real disposable incomes are forecast to increase by 0.4% in 2012, before increasing by 1.5% in 2013. Consumer spending is expected to be flat for the year as a whole, with falls in the first half reversed in the second half, but stages a more convincing recovery in 2013, growing by 1.5%.
Peter Spencer, chief economic advisor to the Ernst & Young 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.
“The boost to household finances and the subsequent pick up in spending should be enough to push the UK back into positive territory this year, but don’t expect a consumer led recovery further out. Longer term, consumers are going to be more focussed on reducing their debt burden rather than splashing the cash.”
The report predicts that unemployment is to hit 8.6% by the end of the year, peaking at 8.7% by 2013.
