UK economy should avoid double-dip recession but outlook remains uncertain

Although the UK economy should avoid a double-dip recession, the outlook will remain uncertain until the end of 2011, with recovery dependent on exports and the ability of the private sector to create domestic jobs.
 
These are the key findings of Ernst & Young's ITEM Club's quarterly forecast entitled 'Economic outlook for business' which uses the Treasury's economic model to make its predictions. The study revealed that, while the economy is forecast to grow by 1.4% this year, following a difficult winter, it is set to grow again by 2.2% during 2011 and nearly 3% in subsequent years.
 
But such growth will ultimately depend on whether sufficient business confidence can be maintained to encourage large companies, which are in the main in "excellent" financial shape, to exploit investment and employment opportunities.
 
Such employment opportunities will come in the shape of the more than 600,000 public sector workers expected to be axed over the next four years as a result of swingeing coalition government budget cuts.
 
The report said: "In the US, the UK and elsewhere, corporate hold the key to recovery: it is vital that they use their cashflows to expand the labour force and invest."
 
This will be particularly true as the government's benefit reforms come into play, which means it will be "important to find innovative ways of absorbing large numbers of people who have been absent from the labour market and are likely to be in need of motivation and training".
 
If such employment creation does not take place, however, “the mismatch between demand for and supply of labour will frustrate the government's plans and undermine the recovery”.
 
Although anecdotal evidence suggests that investment in recent times has been held back by uncertainty over government spending cuts, the Item Club is hopeful that this week's announcement of the Comprehensive Spending Review will help to resolve the situation.
 
Another engine for growth, meanwhile, will be exports, not least because demand in the domestic market will remain weak. Although consumer spending has held up this year despite the squeeze on disposable incomes due to low earnings growth and high price inflation, the introduction of VAT hikes early next year and expected contractions in the housing and credit markets, mean that such growth cannot be sustained.
 
This means that the economy will become more dependent on exports, particularly in terms of goods, which increased by 2.6% in the first quarter of this year and 4.8% in the second.
 
"Export growth will dominate the trade side next year," the report said. "Thus net trade adds 1.3% to GDP in 2011 and another 0.6% in 2012, as the current account of the balance of payments returns to surplus."
 
On the downside, however, the PMI for manufacturing dropped to 54.3 in August and 53.4 in September, largely reflecting a weakening of export orders. Trade figures for July and August also suggested that exports were already "levelling off, reflecting a softening in global demand".
 
Moreover, although the business outlook continued to improve and the number of corporate profit warnings remained at very low levels, "the economy remains vulnerable as government support is withdrawn. Cash flow and counterparty risk still need to be monitored carefully," the report said.