The British economy would likely return to growth in the next six months, buoyed by falling inflation and higher consumer spending, a report from Ernst & Young ITEM Club showed Monday. The economy would see an "Indian summer" this year, the report said.
ITEM Club said inflation should hit 1.7 percent by the end of the year, giving consumers extra cash in their pockets to spend on the high street.
At the same time, it warned that higher consumer spending in the second half of the year would only enable UK GDP to mark time, with zero growth in 2012 as a whole. The Club forecasts 1.6 percent growth in gross domestic product in 2013 and 2.6 percent in 2014.
"Spiralling inflation has cut real wages by 7.5 percent over the last four years, but the squeeze is almost over," said Peter Spencer, chief economic advisor to ITEM Club.
"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," Spencer said.
In the longer term, consumers are going to be more focussed on reducing their debt burden rather than splashing the cash, he added.
According to the report, real disposable incomes are forecast to increase 0.4 percent in 2012, before increasing 1.5 percent in 2013. Consumer spending is expected to be flat for the year as a whole, but may recover growing 1.5 percent in 2013.
ITEM Club said that in the longer term, sustainable growth remains dependent on an improvement in the UK's export performance and business investment.
Spencer said the EU summit in June could have laid the foundations for a gradual revival of business confidence while in the UK, the Treasury's 'funding for lending scheme' should help to free up credit flows.
Meanwhile, the contribution of net trade to GDP contribute very little to GDP this year, at around 0.1 percent.
The latest labor market figures showed a marked improvement in levels of employment in the first quarter. However, the Club report warned that sluggish GDP growth may reverse this positive trend. Unemployment is expected to hit 8.6 percent by the end of the year, peaking at 8.7 percent by 2013.
by RTT Staff Writer
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