ITEM Club cuts growth forecasts

A respected think tank has slashed its growth forecasts for the UK amid rising  uncertainty over the European sovereign debt crisis.

Ernst & Young’s ITEM Club believes the economy will now gow by 1.4% this year rather than the 1.8% it predicted in April. It has also trimmed its expectations for next year by 0.1% to 2.2%

Professor Peter Spencer,  chief economic adviser to 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.

“The uncertainty about Greece and the EU periphery will continue to act as a damper on business investment in the UK, long held up as one of the torches that would light the way to recovery.”

He told TheBusinessDesk.com the economy is patchy with some firms doing better than others.

“Automotive is very strong providing it’s, for example, Ford, Range Rover or Vauxhall while Toyota has been very badly affected by what’s happened in Japan.

“The bottom line is, keep your fingers crossed, hope we avoid another Greece and the outlook is quite promising. I would sincerely hope we in the UK would not go the same way as Greece but the problem is, you can see the dominoes starting to fall and it’s hard to know where they will stop, particularly in the UK.

“We could have a major banking crisis here if things go badly wrong but I think that’s some way off. I am optimistic the dangers will focus minds.”

With inflation set to remain at above 4% this year and earnings growth subdued, ITEM says it sees real household disposable incomes falling by 1.4% this year, following a decline of 0.8% in 2010 – the first back-to-back declines in household income since 1976.

The forecast also shows consumer spending falling by 0.4% this year. The housing market has, at best, moved sideways, it said with prices remaining weak, exacerbated by subdued demand and a continued lack of credit.

ITEM predicts house prices will continue to fall well into next year, down almost 6% from their 2010 peaks.

Prof Spencer added: “At the moment, supply of mortgages is very tight because banks are repaying the money they borrowed from the Bank of England and the Treasury.

“The timeline on repaying that is the end of this year. That money which is going to pay the Bank of England back will be available for mortgage finance so there’s a bit of light at the end of that tunnel.”