By Marcus Leach

Political uncertainty in the eurozone has paralysed the UK recovery, according to the latest quarterly forecast from the Ernst & Young ITEM Club, with UK GDP expected to flatline for the rest of year.

ITEM Club’s winter forecast says that deteriorating levels of confidence will see business investment stagnate in 2012, whilst export prospects have already slowed.

According to the report, the UK is probably already in a technical recession and will struggle to reach positive growth until 2013.

The report forecasts UK GDP of 0.2% this year before increasing to 1.8% in 2013 and 2.8% in 2014.

UK back in recession

“Figures for the last quarter of 2011 and the first quarter of this year are likely to show that we are back in recession and we are going to have to wait until this summer before there are any signs of improvement. But it’s not going to be a repeat of 2009; we are not going to see a serious double dip," Professor Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club explained.

“This time around, UK PLCs have strong balance sheets and have built up large cash stockpiles, which will provide a useful insurance policy if the situation deteriorates further. Business spending has already been cut back heavily. However, with business confidence faltering, investment and recruitment are likely to remain on hold until stability returns.”

ITEM Club forecasts that investment fell by 2.6% in 2011 and will grow by just 0.4% in 2012.

Unemployment will approach 3 million

The labour market outlook also remains bleak. According to the report, sluggish levels of private sector recruitment will be unable to offset job losses in the public sector. ITEM says that unemployment will be just shy of the 3 million mark in the first half of 2013, representing 9.3% of the UK’s labour force.

“We are expecting to see another 300,000 unemployed this year, which is relatively modest when compared to the increase in 2009, but this is adding to an already lengthy dole queue," Spencer said.

“The only piece of good news for UK households is that inflation should fall back below 2% this year, as commodity prices weaken and the VAT rise drops out of the calculation. We will have a bit of extra cash in our pockets, but concerns over rising unemployment are unlikely to see consumers rushing back out onto the high street.”

ITEM says that disposable incomes will decline by 0.8% this year, whilst consumer spending will remain flat before picking up by 1.4% in 2013 as employment prospects brighten and inflation remains low.

Exports still hold the key to UK’s recovery

According to the report, the UK’s recovery is still heavily dependent on exports. Exports accounted for most of last year’s growth, adding 0.9 percentage points to GDP in 2011, but with weakening demand from the Eurozone and concerns over China’s ability to soft land their economy, the outlook for 2012 looks much less promising.

ITEM is predicting export growth of 3% this year, which will add 0.4 percentage points to UK GDP. But this will be dependent on the UK’s ability to continue to re-orient exports away from the Eurozone to the rapid growth markets, such as India and Indonesia.

“Many UK companies rely heavily on their Eurozone trading partners but this is no time for ‘business as usual’; they will need to adapt, assess their long term business models and be prepared to tap into new markets," Martin Cook, commercial managing partner at Ernst & Young, commented.

“Corporates need to start planning for different scenarios, as no-one really knows how the Eurozone crisis is going to play out. Doing nothing is simply not an option.”

But significant risks remain

“There’s a lot hanging in the balance. Our forecast is based on the assumption that the Euro remains intact and that policymakers are able to contain the Eurozone crisis," Spencer concluded.

"However, the longer the uncertainty continues, the more debilitating the impact will be on the UK’s economic prospects.”

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