By Marcus Leach

The Ernst & Young Item Club report has suggested that UK companies need to start spending more of their spare cash in order to ensure a durable economic recovery.

In its 4-year forecast, the ITEM Club says that major companies now need to put their large cash reserves to good use. UK corporate financial surpluses equate to some 6.6% of GDP — making these companies attractive takeover targets.

ITEM says they should take advantage of the rebound in the world economy, the rapid growth of overseas markets and the low pound to finance overseas expansion and new export capacity in order to grow the business. Companies that cannot identify such opportunities should return cash to shareholders rather than cut dividends and pay down debt.

"I agree businesses do need to spend, particularly investing in training and technology to ensure long-term recovery," commented Andrew Watkin, partner as business accountancy firm Baker Watkin.

“Any spending needs to be justified from a business point of view and not just for the sake of it. So, I do not feel it matters who spends, but if the larger companies do, then in theory the smaller companies would benefit.”

The ITEM Club says that only when the Monetary Policy Committee (MPC) sees clear evidence of a real recovery in the corporate sector, should it contemplate raising bank base rate. Moving too soon could hit already-stretched households, delay a recovery in consumer spending and inflame corporate jitters about investment.

The high Consumer Prices Index (CPI) is largely due to January’s VAT increase — which will fall out of the index in the new year — and to increasing commodity prices — which only need to stabilise to stop inflating the index. ITEM’s forecast assumes that a base rate rise is held off until November, yet sees the CPI falling back into line with the target during the course of next year.