ITEM Group Bullish On UK Prospects

The Ernst and Young ITEM Club is a well-regarded forecaster for the UK economy. ITEM stands for Independent Treasury Economic Model and its forecasts are produced on a quarterly basis. The current report makes for happier reading and suggests that the UK economy will enjoy an “Indian Summer” following a very lack lustre first two quarters. It predicts that consumer spending will improve as inflation falls back to 1.7% by the end of the year. However, the overall growth for this year is likely to remain flat.

The UK economy is expected to grow by 1.6% next year and by 2.6% in 2014 according to the ITEM Club evaluation. According to Peter Spencer, the chief economic adviser to the Club: "Spiralling inflation has cut real wages by 7.5% over the last four years, but the squeeze is almost over. Inflation is now coming back to heel, helped by the chancellor's decision to postpone the increase in fuel duty, falling energy and commodity prices, plus tax changes dropping out of the calculation."

The upshot of this is that disposable incomes in the UK are set to rise by 0.4% this year and by 1.5% next year. Whilst this may not sound like much on an individual basis, when integrated against the UK population, it will equate to increased demand which will fuel the UK’s anaemic recovery, although the report suggests that many people will use the additional income to pay down debts. However, I remain to be convinced that the average Britain’s love affair with credit cards is over.

The weak nature of the UK recovery is underlined by the prediction that unemployment will hit 8.6% this year and peak at 8.7% in 2013. The report suggests that business confidence in Europe (and at home) will pick-up as the Eurozone finally comes to grips with the sovereign debt crisis and that UK business spending will grow by 3.4% this year. However, the authors believe that it won’t be until 2015 that business expenditure returns to pre-recession levels. Clearly, the fate of the UK economy is bound up with those of its European partners and a faster resolution of the Eurozone crisis would buoy the UK economy.