Ernst & Young: UK to 'enjoy an Indian summer'

The accountancy firm's ITEM Club forecast predicts the UK economy will return to growth over the next six months thanks to falling inflation and more consumer spending.

by Michael Northcott
Last Updated: 19 Aug 2013

With the economic storm still thundering over Europe, it is hard to believe that we’ll be enjoying boom years any time soon. But if Ernst & Young’s quarterly ITEM Club report is anything to go by, then things are about to start improving. Its latest forecast reckons that inflation will fall to 1.7% by the end of the year, putting the economy in a good position to grow by around 1.5% next year and 2.6% in 2014. Hurrah!

Unfortunately, for the time being, the ITEM Club predicts that economic growth for this year will remain flat, compounding a ‘dismal’ first half. Furthermore, Peter Spencer, chief economic advisor to the ITEM Club says the recovery is unlikely to be consumer-led, as inflation has cut real wages by 7.5% over the last four years and purse strings are tight. With such a squeeze over the last few years, he reckons ‘consumers are going to be more focussed on reducing their debt burden rather than splashing the cash.’ 

Nonetheless, Spencer also reckons the UK public will have a bit more cash as time goes on, thanks to the postponed increase in fuel duty, falling energy and commodity prices and tax changes making people’s wages go further. Spencer described the government’s new ‘funding for lending’ scheme with which it will make it easier for banks to get funding as long as they lend more money, as ‘promising’ and said it ‘should help to free up credit flows’.

Of course, nobody can forget just how serious the situation is looking across the Channel – several countries have banking systems teetering on the edge of an abyss. And closer to home our own manufacturing sector has just seen a sharp downturn in the most recent quarter. But ITEM stands for Independent Treasury Economic Model – meaning it uses the Treasury’s own forecasting model and hopefully eradicates any political spin. So there is a long way to go, and the ITEM Club’s predictions are certainly optimistic, but perhaps more grounded in reality than what the government might say…

Still, we hope the ITEM Club has got it right. Goodness knows everyone’s sick and tired of recession blues.

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