News

April 20, 2012

UK economy will stall until 2013

The UK has narrowly missed a double-dip recession, but the economy will stall until 2013, the Ernst & Young ITEM Club has predicted.

The group predicted UK GDP growth would be a “dismal” 0.4% this year — half the 0.8% estimated by the Office for Budget Responsibility, the Government’s tax and spending watchdog — before rising to 1.5% in 2013 and 2.6% in 2014.

One reason for the pessimistic outlook was that businesses were hoarding a huge cash pile, the ITEM Club said, which it called “a massive drag on the economy”.

It claimed that UK companies were sitting on cash balances of more than £745 billion, rather than fuelling growth by investing their funds and creating jobs. Business investment last year increased by just 1.2%, it said.

Peter Spencer, chief economic adviser to ITEM, warned that the UK would not prosper again until businesses invested their cash. “Business investment has picked up nicely in the US, but UK companies remain extremely risk averse, which is sapping strength from the economy,” he said.

Spencer added that the Government was expecting the private sector to drive the economy forward and urged businesses to “grasp the opportunity quickly” and start spending money. “After three business-friendly Budgets and more tax cuts in the pipeline, it is now up to corporates to play their part in the UK’s recover,” he said.

Business groups have echoed the ITEM Club’s gloomy forecast. The British Chambers of Commerce (BCC) predicted that growth would remain sluggish this year and a normal economy was “unlikely” until 2013.

However, the BCC said businesses needed more Government support in order for small firms to kick-start the recovery, such as increased lending and the cutting of red tape to encourage job creation.

The Federation of Small Businesses also insisted that access to finance remained a problem for many firms. More than one in five businesses cited lack of funds as a barrier to growth in its recent Small Business Index, while four in ten had had loan applications refused.