'Indian summer' may aid economy woe

 

The economy failed to grow in the second quarter of 2012 but will enjoy an “Indian summer” as falling inflation helps hard-pressed households, according to a respected forecaster.

The Ernst & Young Item Club believes the extra bank holiday for the Queen's Diamond Jubilee helped keep the economy in its double-dip recession in the last quarter, capping a "dismal" first half in which confidence was hit by the eurozone debt crisis.

But it predicts a return to growth in the current quarter as faster-than-expected falls in inflation give consumers more money to spend on the high street, while the Olympics will provide a further boost.

However, the second-half growth will merely cancel out the falls in the first half, meaning the economy will be stagnant for 2012 as a whole. Just three months ago, the group had predicted 2012 growth of 0.4%.

It said inflation, which was at 2.8% in May, is set to continue to drop to 1.7% at the end of 2012, helped by the Chancellor's recent decision to postpone the increase in fuel duty and falling energy prices.

Chief economic adviser Peter Spencer said: "Spiralling inflation has cut real wages by 7.5% over the last four years, but the squeeze is almost over.

"The boost to household finances and the subsequent pick-up in spending should be enough to push the UK back into positive territory this year - but don't expect a consumer-led recovery further out.

"Longer term, consumers are going to be more focussed on reducing their debt burden rather than splashing the cash."

To generate a sustainable recovery, the UK needs to concentrate on improving its exports and encourage businesses to invest more, he said.

The medium-term outlook has "cheered up" since its last forecast three months ago, amid optimism that politicians are finally starting to get to grips with the eurozone debt crisis and efforts to boost bank lending in the UK.

Item, which uses the same model as the Treasury, is forecasting a 1.6% rise in GDP in 2013, followed by 2.6% the following year.

But it warned that recent falls in unemployment were unlikely to continue as the private sector struggles to make up for the cutbacks in the public sector. Unemployment will peak at 8.7% next year, up from 8.2% currently.

Mr Spencer added: "This will also have a knock-on effect on pay settlements, weakening employees negotiating power and keeping earnings growth subdued for some time yet."

PA

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