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British economy 'will feel City's pain'

by LLB Editor
31st Oct 11 1:04 pm

The entire British economy will feel the negative impact the eurozone crisis is having on the City, economists have warned.

Ernst & Young’s Item Club expects little or no recovery in financial sector employment in the City next year after some 14,000 jobs were lost on the second quarter of 2011.

Senior Item economist Dr Neil Blake said: “Given the extent to which highly paid employment in the sector underpins consumer spending, tax revenues and house prices in the UK, the projections for financial services employment is concerning.”

Economic recovery in the UK will be hampered by the knock on effects from the financial sector, which “will be far-reaching, impacting employment, increasing loan write-downs by £3bn, and reducing lending”, even if measures to remedy the crisis are put in place, Item said.

“The Government has set out to de-risk the sector and make the UK less reliant on it in order to make the economy more secure. Unfortunately, if no other sectors step into the resulting gap, prosperity will go down across the country,” the economic think-tank added.

Unemployment across the country will hit 8.3 per cent in 2012 before topping out at 8.4 per cent in 2013, it said.

Item also warned that chancellor George Osborne is set to miss his target of reducing the deficit. Osborne’s chances of cutting the deficit have been hit by weaker than forecast economic growth and stubbornly high government spending.

Economists expect growth of 0.3 per cent in the third quarter of the year when the first estimates are released on Tuesday, while growth for the full year is likely to be less than one per cent, before expanding by 1.5 per cent next year.

Item’s warning over rising unemployment has been echoed by the Centre for Economics and Business Research (CEBR), which predicts increasing unemployment in most UK regions. The number of jobs in London is not expected to rise until 2015 and unemployment will remain higher than the national average for the entirety of the CEBR’s five-year forecast period, it said.

The Resolution Foundation said consumers are unlikely to help the economy recover. A new report from the group has found 32 per cent of adults have cut down on their spending in the last 12 months, while 19 per cent intend to over the next year.

Meanwhile, the Lloyds Bank Corporate Markets’ business barometer showed business confidence dropped to its lowest level in 30 months in October. The barometer’s reading of minus 15 is down 22 points on September.

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