UK economy 'remains in double-dip recession'

The UK economy remained in a double-dip recession in the second quarter of the year but will pick up later in 2012, it has been forecasted.

The extra bank holiday for the Queen’s Diamond Jubilee contributed to keeping the economy in recession in the last quarter, according to the Ernst & Young Item Club, bringing to a close a “dismal” first half where the eurozone debt crisis hit confidence.

However, households can look forward to an “Indian summer” towards the end of the year as consumers feel the benefit of falling inflation.

Faster-than-expected drops in inflation will help the economy return to growth in the third quarter, it predicts, as consumers have more money to spend on the high street, while the Olympic Games will also help.

The Item Club believes second half growth will only cancel out a wretched first half, leaving the economy stagnant for the year as a whole. The group had forecast 2012 growth of 0.4% just three months ago.

Inflation was at 2.8% in May and is expected to fall to 1.7% by the end of the year, as chancellor George Osborne’s recent decision to delay the increase in fuel duty and decreasing energy prices have an impact.

Peter Spencer, the chief economic adviser, said: “Spiralling inflation has cut real wages by 7.5% over the last four years, but the squeeze is almost over.

“The boost to household finances and the subsequent pick-up in spending should be enough to push the UK back into positive territory this year – but don’t expect a consumer-led recovery further out.

“Longer term, consumers are going to be more focussed on reducing their debt burden rather than splashing the cash.”

Spencer recommended the UK concentrates on boosting its exports and encouraging businesses to invest if it wants to generate a sustainable recovery.

Optimism that politicians are finally getting to grips with the eurozone debt crisis and efforts to increase bank lending in the UK have “cheered up” the medium-term outlook since the Item Club’s last forecast three months ago.

The group believes GDP will rise by 1.6% next year, followed by an increase of 2.6% in 2014.

But recent drops in unemployment are unlikely to continue because the private sector will struggle to make up for cutbacks in the public sector. Unemployment stands at 8.2% at the moment, but it is forecast this will rise to 8.7% next year.

Spencer added: “This will also have a knock-on effect on pay settlements, weakening employees negotiating power and keeping earnings growth subdued for some time yet.”