More money in your pocket – once harsh spring is over

Economists predict fall in inflation next year which will ease strain on household finances

Next year will bring rising unemployment, falling house prices, multiplying business failures and a double-dip recession to Britain, economists believe.

The first few months of the year will undoubtedly be painful – but as spring turns to summer people should feel they have more money in their pockets again. And the London Olympics will boost growth, drawing tens of thousands of tourists to the country.

The consensus is that inflation will come down in 2012, which should leave people with more disposable income again. "We're expecting real wages to turn positive again next year," said Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM club. "That should provide some breathing space."

There is a strong chance the UK economy will contract in the first quarter of 2012 thanks to weak manufacturing, service and export sectors, Mr Goodwin said. If Britain does register two quarters of contraction we would technically be in recession once again.

Economists expect the Olympics, which will take place in July and August, to boost growth but do not anticipate the games having a significant impact on the broader economic picture. "It's going to be fairly short-lived" said Chris Williamson, chief economist at Markit. "It's not dealing with the longer-term problems that the UK faces, which is years of neglect of its manufacturing base."

Independent economists warn that the outlook for unemployment in 2012, which presently stands at 2.64 million, is bleak. "I think the labour market is going to continue to deteriorate, possibly as soon as January," said Mr Williamson. Mr Goodwin agreed: "The private sector just can't create jobs fast enough to offset what's happening in the public sector. It's conceivable that we could see private-sector employment start to fall as well."

Hopes that Britain might have avoided an economic contraction in the fourth quarter of this year are based on the fact that Britons have continued spending in spite of rising unemployment and consumer-price inflation of 4.8 per cent. "The retail sales figures have actually held up pretty well" said Philip Shaw, an economist at Investec.

But Mr Shaw also warned that this might not last. "We wouldn't be surprised if we begin to see some weaker news on the spending front and that could be consistent with the economy going into recession," he said. Mr Williamson warned, "I think we're going to see some bad news from the retail market, with some chains collapsing."

No analysts expect house prices to rise in 2012, which, in turn, is likely to depress consumer confidence. "The mortgage market is going to remain moribund due to constraints on bank lending, which should compound low consumer morale," said Mr Williamson.

Public spending cuts will also intensify in 2012 too, with the Chancellor due to take a further £16bn out of the economy in 2012-13. "This is going to be the worst year for the public sector to date," said Mr Goodwin. "The only hope is that there's been a lot of front-loading of the public sector job cuts so it's possible you might see the pace of job losses slow down next year."

The Office for Budget Responsibility predicted in November that the UK will generate growth of 0.7 per cent over 2012 and avoid a return to recession. But many other forecasters feel the OBR is being over-optimistic.Economists also agree that the one of the key determinants of the degree of economic misery that Britain will experience in 2012 will be the situation in Europe.

"If there is recession on the Continent this will interrupt trade flows and hinder the amount of business UK companies can carry out," said James Hickman, managing director of the money exchange firm Caxton FX.

Mr Goodwin agreed: "The key for us is really the eurozone. All UK forecasts are very much dependent on a successful outcome to the debt crisis. If it doesn't happen we've got major problems."