Consumer spending set to fuel economic recovery – Ernst & Young
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 a new survey.
The latest economic forecast from the Ernst & Young ITEM Club 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.
The ITEM Club’s autumn forecast claims that GDP will stutter to -0.2% this year overall, before increasing to 1.2% in 2013 and 2.4% in 2014.
Peter Spencer, chief economic advisor to the ITEM Club, said: “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.”
The club said net trade was 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.
According to the report, an improving outlook for consumers combined with easing credit conditions will also lay the foundations for a recovery in the housing market. The report suggests housing transactions will bottom out this autumn, before recovering in earnest in spring next year, with house prices set to follow.
“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,” added Mr Spencer.
However, the report said this was where the good news ended.
It claimed the UK’s late growth spurt in the second half of the year was unlikely to be enough to allow the Government to meet the Office for Budget Responsibility’s (OBR) deficit forecast of £95bn for 2012/13.
The ITEM Club now expects both the Public Sector Current Budget (PSCBX) and Public Sector Net Borrowing (PSNBX) to overshoot by around £8bn.
“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,” said Mr Spencer.
“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.”
