Ernst & Young’s economic forecasting group ITEM Club has issued a report setting the UK economy’s 2011 growth rate at just 0.9%, down from the 1.4% predicted just three months ago. Next year’s growth statistics also make for grim reading: the 2012 forecasts have been slashed by almost half, from 2.2% to 1.5%. The group also predicts unemployment will hit 2.7 million by the Spring of 2013.
These gloomy pronouncements follow the dire figures issued by the Office for National Statistics earlier this month, showing a paltry 0.1% growth in the second quarter.
This arrested growth has been attributed to the Euro crisis alongside the general instability in the Eurozone. ‘It’s worse than we thought,’ says Peter Spencer, chief economic adviser to the Ernst & Young Item Club. ‘The bright spots in our forecast three months ago - business investment and exports - have dimmed to a flicker as uncertainty around Greece and the stability of the Eurozone increases.’
The ITEM Club has also warned that the latest tranche of quantitative easing from the Bank of England is unlikely to boost growth. The £75 billion announced last week has been issued in gilts alone to try and ensure that money trickles down to the hardest-hit firms in the private sector but this could be more wishful thinking than economic fact.
Instead, the forecaster has issued a recommendation to the Bank of England to cut interest rates from 0.5 percent to 0.25 percent, introduce targeted tax reliefs, cut national insurance contributions for people under 21 and bring down stamp duty to help stimulate activity in the flagging construction sector.
The macroeconomic significance of the group’s findings is no rosier. Without growth, the chances of saving our way out of the deficit are even more remote. Austerity alone cannot solve the UK’s problems – despite all the cuts public borrowing is still accelerating, with the government borrowing a whopping £15.9bn in August, a new high for the month. Better put your tin hats on...