Economy picks up short term, but long term change needed

The economy has moved out of a decade of debt and into what is likely to be a decade of painful readjustment, according to the quarterly forecast from the Ernst & Young Item Club.

Item expects the UK to pull out of recession when fourth-quarter gross domestic product figures were released this month, but has warned that what recovery has been made to date has been driven mainly through restocking, the car scrappage scheme and the VAT increase. Once those are taken out of the equation, Item forecasts that GDP will struggle to reach one per cent while unemployment will continue to rise. "Once the effects of these temporary stimuli have worn off, it is difficult to see where the growth is going to come from in the short term," warned the Item Club.

The key to longer term recovery lies with overseas investment and exporting to markets such as China, it argues.  "After a decade of relying on the domestic consumer, firms have to start chasing overseas customers," said Peter Spencer, chief economic advisor at Item.  “The consumer is completely cashed out - with consumer spending likely to increase by just 0.4% this year.  With the Anglo-Saxons stony broke, earning money from world trade has to provide the main stimulus to keep output growing."

"The economy must now stand on its own two feet. Growth is almost totally dependent on a sustained upturn in the world economy and upon the energy and enterprise of UK exporters of our prized goods and services The UK's only hope of significant [economic] growth is a rebound in overseas exports and income - as well as inward investment. 

Spencer added that the UK banking sector balance sheets are in urgent need of repair. "The UK economy has moved out of a decade of debt and into a decade of painful readjustment,” he said "Credit flows are unlikely to normalise until the UK banks repay the obligations to overseas banks and the government that they built up on our behalf over the decade of debt.”