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It’s only business investment which can save the economy

This is the substance of an economic forecast just released by the Ernst & Young ITEM Club. Whilst acknowledging that the UK may have been saved from a double dip recession by a ‘loose’ monetary policy, the ITEM Club believes that UK GDP growth will be a dismal 0.4% this year, before rising to 1.5% in 2013 and 2.6% in 2014. This is more pessimistic than the recent forecast by the Office for Budget Responsibility, which anticipates growth of 0.8% in 2012 and 2.0% in 2013.

When will businesses start to turn on the taps and invest their cash reserves?

The report notes that UK businesses are stockpiling cash at an increasing rate. The cash balances of private non-financial companies are now worth over £754 billion, which is equivalent to a staggering 50% of GDP. However, last year, business investment only rose by 1.2%.

Peter Spencer, chief economic advisor to the ITEM club, said that the UK won’t begin to prosper until these funds are put back into the economy. He said: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy. Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”

The ITEM forecast shows that even if businesses grow investment by 6% next year and 10% in 2014, that won’t go far enough, as the company sector financial surplus is still expected to increase from 5.2% of GDP in 2011 to 5.6% in 2014.

The report also points to the fact that households remain under intense pressure with unemployment expected to approach 9.3% by the middle of 2013 before falling back. Although falling inflation driven by lower commodity prices will lead to a gradual improvement in levels of disposable income Spencer comments: “…make no mistake; consumers can’t lead this recovery.”

ITEM forecasts that disposable income will fall by 0.2% in 2012, while consumer spending will increase by 0.8% before accelerating to 1.1% in 2013 as household incomes gradually strengthen.

One good piece of news is the strength of the export sector. Exports of goods increased by 5.1% in volume terms in 2011, while services were up by 3.9%. The report forecasts export growth of 4.5% this year with net exports adding 0.3% to GDP.

According to Spencer: “…exports are helping to keep the UK in positive territory. A 0.3% contribution to GDP might not sound a lot, but this will increase as international markets continue to improve.”

“However, this remains a major risk to our forecast. The Euro time bomb hasn’t been de-fused, while geopolitical tensions in the Middle East continue to be a cause for concern because of their potential to cause a spike in oil prices. If these crises escalate, UK exports and GDP would be a major casualty.”

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Posted in Employment, GDP, Household income, Investment

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