The UK economy has bounced back from recession and should avoid a double dip, according to the latest Ernst & Young ITEM Club quarterly forecast.
However, the report warns the economy is heading for a soft patch over the winter as momentum declines.
Nevertheless, the report will make welcome reading for the Government ahead of its Comprehensive Spending Review announcement on Wednesday, which is widely expected to herald massive cuts in the public sector.
The ITEM Club study concludes domestic and overseas markets have recovered nicely during the first half and it has predicted GDP growth of 1.4% this year and 2.2% in 2011.
However, it said it remained cautious as the outlook remained uncertain, with opinion divided over the future prospects for the UK economy.
It said with businesses and consumers preparing for the government’s five year fiscal deficit reduction programme and further evidence that exports were levelling off due to a decline in global demand, it was not surprising the MPC was wrestling over the prospect of a second round of quantitative easing.
Yet despite the obvious tensions within the economy, ITEM said the concerns which have arisen on the risks of the UK economy overheating, or suffering a bout of deflation, have been exaggerated.
It predicts CPI inflation will move below target from January 2012 as the VAT increase finally drops out of annual calculations, and holds firm on its view that interest rates will not go up again until 2014.
Adrian Cooper, economic adviser to the ITEM Club, speaking to TheBusinessDesk.com, said despite the uncertainty in the economic situation there was still growth potential, although this was be driven by exports.
“We have factored in some of the current economic data but nevertheless, we still see growth reaching 1.4% this year and this will rise to 2.2% next year,” he said.
“We remain hopeful of a manufacturing-led recovery, boosted through exports although this will be influenced by global events.
“There is still uncertainty surrounding the mid-term elections in the United States and the direction economic policy may go there, while the measures taken in Europe to shore up economies there will also have a bearing on trade.”
Opportunities may therefore lie outside traditional markets and so firms need to be flexible in their approach to exports.
Mr Cooper said he hoped the competitiveness of sterling would remain to enable companies to make their goods more attractive to foreign buyers.
A lot will depend on the outcome of the CSR but Mr Cooper said he was hopeful firms would continue to push for growth.
“Obviously we still don’t know who are going to be the big losers will be, but whatever happens on Wednesday hope the announcement will end a lot of uncertainty and boost business investment,” he added.
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