City: Euro crisis points to more growth pain for UK

 

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The Independent Online

The spluttering UK economy will grow at less than half the pace forecast by the Government's independent watchdog in 2012 as the nation faces up to its most brutal year since 2009, experts warned today.

A survey of leading economists by the Independent forecast growth of 0.3% next year on average – less than half the 0.7% pencilled in by the "optimistic" Office for Budget Responsibility.

An even worse outcome looms large if Europe's debt crisis takes a fresh turn for the worse. The Centre for Economics and Business Research has warned that the eurozone could shrink by 2% if leaders fail to get to grip with the lingering sovereign debt woes – wiping some €200 billion off the single currency bloc overall and crippling the UK's biggest trading partner.

The dramatic impact of the continent's woes on the UK's prospects is underlined by comparison with the beginning of 2011, when the same experts were forecasting far healthier 2% growth for 2012 on average. More disappointment on growth would throw up yet more headwinds to Chancellor George Osborne's efforts to cut the deficit.

IHS Global Insight's Howard Archer said: "The OBR forecast for 2012 is looking increasingly optimistic and that there are major downside risks to the forecast – obviously events in the Eurozone being one."

Since the summer's turmoil, the Bank of England has begun to pump cash into the economy again and dole queues have climbed sharply. Most pundits expect the Bank to print at least £100 billion more during the first half of 2012.

HSBC's chief UK economist Simon Wells warned: "It's a brave person that isn't putting Europe at the top of the watch list. In terms of our central case we're assuming Europe kicks the can down the road – although there are huge downside risks."

But pundits also found some optimism. The Bank of England's rate-setters are expecting the inflation pressure on household finances to ease quickly as the cost of living falls back from its current highs of 4.8%. Last January's rise in VAT to 20% falls out of inflation figures, while energy prices have also stabilised.

ING Bank economist James Knightley – who nonetheless forecasts 0.3% growth next year – said: "We should see the first rise in real terms in incomes for four years, and there will be a fresh rise in personal tax allowances in April, which will put more money in peoples' pockets,"

Royal Bank of Scotland UK economist Ross Walker also pointed to signs of stronger growth in the US, which should also benefit Britain despite Europe's malaise. But Tony Dolphin, chief economist at the Institute for Public Policy Research, said the outlook for 2012 was "bleak". "In the short term, economic policy has become a matter of hoping that something turns up – and that is why, for the UK economy, 2012 is unlikely to be a happy new year," he added.

...as Spain braces for new downturn

Spain's new economic minister braced the struggling nation for a fresh slump yesterday as its new centre-right government prepares to announce austerity measures later this week.

Spain – with a jobless rate of more than 20% – saw its economy stagnate between July and September but worse is to come in the current quarter as exports slow to a trickle and domestic demand falls away, Luis de Guindos warned.

He said: "It's certain that the Spanish economy shrunk in this quarter... which will determine how we begin next year, relatively decelerated. The next two quarters, we shouldn't fool ourselves, won't be easy from the point of the view of the economy or employment."

Spain emerged from an 18-month recession in early 2010 but has struggled to grow ever since, weighed down by a property boom gone bust and massive unemployment. Since his People's Party won a landslide victory in November, prime minister Mariano Rajoy has put a freeze on public sector hiring and is set to unveil spending cuts on Friday to cut the deficit to 4.4% next year.

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