Euro woes hit UK growth prospects

Growth in the UK will slip to beneath 1 per cent this year as the eurozone crisis hits confidence, according to the latest forecast from the Ernst and Young ITEM club.

The economic forecasting group, which uses the same model of the UK economy as the Treasury, also predicts that growth in 2012 will come in at just 1.5 per cent, well below the 2.2 per cent it expected as recently as August. The club, which also predicts that unemployment will rise to 2.7 million by the spring of 2013, has cut its growth forecasts because of the eurozone sovereign debt crisis, which it says has hit the confidence of businesses and jeopardised the prospects of exporters.

Peter Spencer, the club's chief economic adviser, said: "It's worse than we thought. The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty about Greece and the stability of the eurozone increases." The club says that the Government is also on course to miss its deficit-reduction targets, with borrowing overshooting by £8bn in 2011/12.

It also warned that the Bank of England's extension of its Quantitative Easing scheme is unlikely to deliver a significant boost to the economy since long-term government bond rates – which the extra £75bn in asset purchases would be partly designed to bring down – are already at record lows, at around 2.5 per cent for 10-year money.