ITEM Club: Decade of painful readjustment United Kingdom

01-20-2010 16:02

The British economy has ended the debt decade and has started a decade of painful adjustment, according to today’s latest Ernst & Young ITEM Club quarter-to-quarter estimation. The UK economy has to abandon borrowing and spending and move to exporting and saving, the ITEM Club stated.

Gross domestic product

The think tank said that gross domestic product will post a sluggish 1% growth in 2009, while especially the first six months of this year will be weak. The forecasted 1% expansion corresponds with the autumn estimation published in October. Last year’s spending was boosted by the stamp duty holiday, the value added tax (VAT) decrease and the scrappage incentive program, but took away this year’s economic expansion. The Item Club forecasted a 4.8% shrink for last year.

UK economy

The economy will probably grow by 3.1% in 2012 and by 2.5% in 2011. The painful improvement is evidently dependent upon enterprise of exporters and energy, according to the think tank. Exports will rise approximately by 10% a year in 2011 – 2012, the Item Club forecasted in its winter economic forecast report. The drop in the exchange rate will be favorable, however, the readjustment will mostly be the result of the weak domestic demand since British exports are price immune.

Disposable incomes

The labor force has proven its responsibility during the economic slump by accepting little income rises and short time working. The ITEM Club reported that real disposable incomes increased by 3.7% in 2009. Consumption dropped by 3%, while the saving ratio rose by approximately 7.5%. Real disposable incomes will remain flat as the impulse from easing inflation and interest rates will be absent in 2010. Consumer spending will increase only by 0.4% this year and it will be difficult for people to raise their savings.

Operate independently

“It’s time for the economy to operate independently,” professor Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, commented. The focus should be on substituting government borrowing and demand by foreign income and restoring balance in the economy in a more durable way.

Item Club

The Item Club forecasted that the number of housing transactions will continue to be weak and the termination of the stamp duty holiday late December will extend the finances of initial buyers. The construction sector and its suppliers will be affected if the bad weather continues.

NIESR

New forecasts by the National Institute of Economic and Social Research (NIESR) demonstrate that the British economy grew by 0.3% in the last quarter of last year, following six consecutive quarters of shrinkage. NIESR had forecasted a 4.8% shrink for 2009, which would be the worst shrink in the UK since 1921 and it would be a larger decline than in any year of the Great Depression.
Office for National Statistics
The Office for National Statistics (ONS) will release its fourth quarter gross domestic data on January 26. The UK economy contracted by 0.2% in succession from July through September, according to official figures.