The Ernst & Young ITEM Club downgraded its economic growth outlook for the U.K. for the coming three years as the fiscal squeeze is set to act as a drag on the recovery. The interest rate is forecast to remain on hold until the end of 2013 on tight fiscal policy and the weak economy.
The economy will grow 1% this year, followed by 2.2% in 2011, the research group said in its latest Summer forecast, released on Monday. ITEM Club downgraded its estimate for 2011 from 2.7%. The forecast showed a weak economy that gradually picks up speed as it adjusts to the rigours of the budget.
For 2012, growth is seen at 2.8%, in line with budget forecast, but down sharply from the previous estimate of 3.4%. The growth rate is likely to approach 3% in 2013 and 2014, the think tank assessed. The previous estimate had showed a 3.1% rise for 2013.
Data released by the Office for National Statistics last week showed an acceleration in economic growth in the second quarter of 2010. The economy expanded 1.1% sequentially, the largest growth in four years.
One way or another, the coalition will achieve its ambition of achieving cyclically-adjusted balance on current account by 2015-16. "Despite the new Chancellor's ambitious fiscal target, the outlook for the public finances and the economy remains very cloudy," ITEM Club noted. The June Budget has the effect of slowing growth initially. "But as a result, growth is faster towards the end of the forecast and better balanced."
Further, exports and global trade will bounce back strongly over the next two years. The competitive currency and the weakness of home demand are expected to push export growth up to 8% in 2011 and nearly 9% in 2012, the report revealed. This time, the consumer is in no position to pull the economy out of recession and the thrust has to come from business spending.
According to ITEM Club, moving into 2012 and the later years of the forecast, public spending cuts will maintain the pressure on the labour market and disposable income. The two-year pay freeze should help protect the public payroll, but even so, the group assessed that 150,000 jobs will be lost in the sector over the coming 5 years. Unemployment is likely to fall back gradually to 6% by 2014 from a peak of 8% this spring.
Further, ITEM Club forecast consumer price inflation to remain well above target over the next eighteen months. But as the impact of higher energy prices and taxes wears off and spare capacity bears down on pricing decisions and wage bargaining, it is seen moving significantly below 2%.
Financial markets are signaling that interest rates are going to start recovering soon as the relaxation in monetary policy draws to an end. But the latest forecast from ITEM Club suggests that the bank base rate will remain on hold until the end of 2013.
The benign outlook for interest rates should provide support for the housing market as well as retailers who are facing another challenge as Value Added Tax goes up next year. Still housing transactions are likely to remain depressed, keeping the household goods sector under pressure.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.