UK economy 'will remain grounded until year end'


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The Independent Online

The British economy is set to stall for the rest of the year as nervous businesses remain reluctant to invest in recovery, an influential economic forecaster warned today.

The Ernst & Young ITEM Club reckons the economy will edge ahead by an anaemic 0.4 per cent in 2012, growing at just half the pace predicted by the Office for Budget Responsibility, according to its latest forecasts.

ITEM predicts stronger growth of 1.5 per cent next year although this again falls short of the OBR's 2 per cent prediction. The forecaster blamed sluggish growth in business investment for the shortfall as UK firms stockpile cash balances worth a staggering £754 billion. Despite their cash-rich position, business investment grew by just 1.2 per cent last year.

Chief economic adviser Peter Spencer warned that the recovery would struggle until the funds are put back into the economy. "Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy," he said. "Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list."

ITEM also warned that household budgets would remain under heavy pressure while investment-shy firms struggle to create the jobs to offset losses in the public sector as Chancellor George Osborne's austerity programme takes hold in earnest. Unemployment is expected to approach 9.3 per cent by mid 2013 with nearly three million out of work, although wage growth should finally catch up with falling inflation.

Mr Spencer added: "For the first time in years, the gap between wage growth and inflation should start to close, before reversing in 2013. This will feed through to the tills on the high street and will be given an additional boost by the Olympics. But make no mistake: consumers can't lead this recovery."