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Economy 'is stalled at a dangerous junction'

By Jamie Grierson

Published 17/10/2011

A key forecaster has slashed its growth estimates for the UK and warned the economy has stalled at a "dangerous junction".

The Ernst -amp; Young ITEM Club cut its gross domestic product (GDP) forecast to just 0.9% this year, down from the 1.4% it predicted three months ago, and 1.5% in 2012, down from 2.2%.

Uncertainty across the Eurozone, predicted to grow by 1.6% this year, and a slowing world economy, is undermining business confidence and investment decisions, the ITEM Club added.

Furthermore, the ITEM Club warned the Bank of England's injection of an additional £75bn of quantitative easing (QE) is unlikely to spur the recovery.

The report comes amid a raft of surveys, such as soft manufacturing and services data, which all point toward the UK heading towards a double-dip recession.

Peter Spencer, chief economic advisor to the Ernst -amp; Young ITEM Club, said: "It's worse than we thought. 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.

"With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track."

The report predicts that business investment will be flat this year and exports will increase by just 6%, much less than looked likely three months ago.

The ITEM Club warned that increased QE would not be the silver bullet to the country's economic woes. Mr Spencer said the Bank should instead consider cutting already record low interest rates from 0.5% to 0.25%.

"It would provide a boost to borrowers and potentially help to stimulate consumer spending during the difficult months ahead," he said.

Elsewhere, the ITEM Club forecasts that the UK's unemployment rate will increase to 2.7 million by the spring 2013 and called on Chancellor George Osborne to cut employer National Insurance contributions for under-21s.

Mr Spencer said: "With the public sector cuts starting to feed through in the UK, it's vital that the private sector labour market continues to stay afloat."

The ITEM Club also called for a cut to stamp duty in a bid to stimulate the housing market.

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