UK ‘already back in recession’, warn forecasters

• Eurozone crisis hitting UK exports
• Ernst & Young Item club predicts 0.2% growth for 2012
• Centre for Economic and Business Research forecasts 0.4% decline

The UK is likely to already be in recession, according to two highly regarded economic forecasters, as developments in the eurozone paralyse the country’s recovery.

The Ernst & Young Item Club and the Centre for Economics and Business Research (CEBR) both believe that gross domestic product (GDP) shrank in the final quarter of last year and will fall again in the first three months of 2012. A recession is defined as two consecutive quarters of contracting output.

The prospects for the economy in the UK are closely tied to the fate of the eurozone, according to both reports, which is hitting the export trade so crucial to the country’s recovery.

The warnings come shortly after France, the second biggest economy in the eurozone, saw its AAA credit rating downgraded by Standard & Poor’s (S&P) in a move which signals more troubles for the single currency bloc.

Professor Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: “Figures for the last quarter of 2011 and the first quarter of this year are likely to show that we are back in recession and we are going to have to wait until this summer before there are any signs of improvement. But it’s not going to be a repeat of 2009 – we are not going to see a serious double dip.”

The Item Club report forecasts GDP growth of just 0.2% this year before increasing to 1.8% in 2013 and 2.8% in 2014.

Item said that deteriorating levels of confidence will see business investment stagnate in 2012, while export prospects have already slowed.

However, the group said UK companies have stronger balance sheets than in 2009 and have built up large stockpiles of cash, which will provide a useful insurance policy if the situation deteriorates further.

The Item forecasts that investment fell by 2.6% in 2011 and will grow by just 0.4% in 2012, while unemployment will approach three million, representing 9.3% of the UK’s labour force.

Prof Spencer added: “The only piece of good news for UK households is that inflation should fall back below 2% this year, as commodity prices weaken and the VAT rise drops out of the calculation.”

The forecaster said exports accounted for most of last year’s growth, adding 0.9 percentage points to GDP in 2011, but with weakening demand from the eurozone and concerns over a hard landing for the Chinese economy, the outlook for 2012 looks much less promising.

Meanwhile, the CEBR revised down its forecast for growth for 2012 as a whole from 0.7% growth as predicted last October to a decline of 0.4% with a risk of a more serious decline of 1.1% if developments in the eurozone are worse than feared.

Douglas McWilliams, one of the report’s authors and chief executive of the CEBR, said: “We take no pleasure in outlining such a bleak forecast. But the world is going through a fundamental change where previously poor economies are industrialising fast.”

S&P stripped France of its gold-plated AAA credit rating on Friday, and also lowered the long-term ratings on Austria, Malta, Slovakia, and Slovenia, by one notch.

The rating levels for Cyprus, Italy, Portugal and Spain were dropped two notches.

There was no change for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

A Treasury spokeswoman said: “The uncertainty in the euro area continues to have a chilling effect on the UK as well as elsewhere, but there are reasons to be optimistic: business surveys showed the UK service and construction sectors strengthening at the end of 2011, and the government’s credible fiscal plan is helping keep UK interest rates at record lows.”


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