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Large companies are swimming in cash, while consumers are drowning in debt

So says the Quarterly Economic forecast produced by the Ernst & Young Item Club. They forecast that UK GDP growth will be only 1.8% this year, but will rise to 2.3% in 2012 and 2.7% in 2013.

Where will the growth come from? They believe that there will be a “major revival” in business spending and forecast that business investment will rise by 12% this year and 14% in 2012.

Will corporate investment fire up the economy, or is it all just a smokescreen?

The report notes that UK companies are currently sitting on a mountain of cash which has been stockpiled since the end of the recession. In fact, they estimate that this spare cash amounts to no less than 7% of GDP. They therefore see investment expenditure as the main driver of growth and on top of this they believe that UK exports will rise by 9.9% this year, to provide another input to GDP growth.

They point out that our economic salvation cannot come from additional consumption, as the squeeze on households’ disposable income will continue. Disposable incomes are expected to fall for the second year running, something which has not been seen since the 1970s.

This analysis was summed up by Peter Spencer, chief Economic Advisor to the Ernst & Young Item Club, who said: “….large companies are swimming in cash, while consumers are drowning in debt…. Companies now need to loosen their grip and put that cash to good use for any durable recovery to occur.”

However, reported the Bellweather survey today, which showed that business confidence was at a two year low. The survey found that 25% of companies cut their marketing budget in the first quarter of this year, for the second consecutive quarter.

If companies are cutting their marketing budgets, which are necessary to sell the goods they are already producing, how are they going to have the optimism to invest in creating the capacity to produce even more product?

This shows that there is a very fine line as far as business confidence is concerned. The money to invest is there but the confidence is lacking. A rise in interest rates is likely to break that fragile thread altogether, and we must hope that the MPC continues to hold off from raising interest rates.

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Posted in economic growth, GDP, Household income

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