The immediate prospects for the UK economy are "dismal" but an export-led recovery should emerge next year if the private sector capitalises on fresh opportunities.
According to the Ernst & Young ITEM Club, weakness in the consumer sector, a stalling housing market recovery and falling business investment will hold growth back while the Treasury's economic forecasts "lack precision" and pin hopes of revival on an increase in domestic demand, which appear "unlikely in the current circumstances".
"The immediate prospects for the economy remain dismal. We still think that the UK will struggle to achieve 1% growth this year," said Peter Spencer, the club's chief economic adviser. "UK PLC needs to take bold steps to finance overseas expansion as well as new export capacity to grow the business and provide the economy with a strong export-led revival.
“Exports provide an opportunity to steer our way out of this situation, but ultimately business must put its shoulder to the wheel. There are good reasons to be optimistic about exports and overseas demand. The competitive pound provides the carrot and the weak home market provides the stick.It is now time for those companies who are in a strong position and who have been able to save cash and pay down debt to step up to the plate.”
The Item Club forecast says that households’ share of national income fell from 76% in 2001 to 70% in 2008 and will be squeezed further. It says that consumer spending will rise by only 0.5% this year and by 0.9% in 2011. However, it said companies ran a £26bn surplus in the fourth quarter, and argued a sharp rebound in business investment was likely after 2010, forecasting a 10% rise in 2011 and a 14% rise in 2012.
"The next government will be negotiating uncharted waters. It is hard to find a precedent for a situation in which companies are so strong and consumers so weak. Exports provide an opportunity to steer our way out of this situation, but ultimately business must put its shoulder to the wheel," said Mr Spencer. "The weakness of sterling provides a plethora of profitable investment opportunities. UK plc needs to take bold steps to finance overseas expansion as well as new export capacity in order to grow the business and provide the economy with a strong export-led revival."
But the UK has better prospects than some other parts of Europe. Germany, France and the Benelux economies are gaining momentum, but growth in the Eurozone’s Mediterranean economies and Ireland will be held back in the next two years. Growth in the Mediterranean economies and Ireland is forecast to average only 0.6% combined per annum over 2010-12, compared to 1.8% in Germany, France and the Benelux.
Ernst & Young noted: "Measures announced by the Irish government since July 2008 equate to a cumulative fiscal tightening of almost 9% GDP between 2008 and 2011- a significant response when compared to the fiscal decisions taken by other eurozone economies, the UK and US. It is the severe action taken by the Irish government that has shielded Ireland from a Greek-style financial crisis.”