UK recovery reliant on consumers

Consumers will have to prop up the economic recovery over the next year if the UK is to weather the storms facing exporters, a leading forecaster has said.

Ernst & Young's ITEM Club believes that recent trends of falling inflation and rising employment levels should boost consumer demand and help the UK grow by 1.2% next year, compared with a GDP decline of 0.2% this year.

However, the forecast is weaker than its earlier estimate of 1.6%, with its caution reflecting the weakening outlook in markets such as the United States, India and China, as well as the ongoing eurozone crisis.

Peter Spencer, chief economic adviser to the ITEM Club, said the UK is relying heavily on the high street to come to the rescue.

He added: "The fundamentals are in place to enable this to happen. Inflation is coming back to heel, private sector employment is holding up, and the housing market also looks poised for a revival. But it's not the balanced, long term sustainable growth we were hoping for."

He said net trade will subtract 0.6% from GDP this year, whereas disposable incomes are forecast to increase by 1.4% in 2013.

The ITEM Club predicts housing transactions will bottom out this autumn, before recovering in spring next year, with house prices set to follow.

Mr Spencer added: "Lending has started to loosen up and we're hopeful that the housing market is primed for a recovery early next year. There are though plenty of 'ifs' and 'buts'. The big question is the extent to which consumers will choose to grasp the opportunity or continue to deleverage and to pay down their debts."

The report also says that the UK's growth spurt in the second half of the year is unlikely to be enough to enable the Government to meet the Office for Budget Responsibility's deficit forecast of £95 billion for 2012/13.

The forecaster is looking for growth of 2.4% in 2013 but risks dominate the outlook and Mr Spencer said the move towards balanced growth over the medium term hangs upon a recovery in world markets.