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UK Already Back in Recession: Think Tank

Monday, 16 Jan 2012 | 5:09 AM ET

The United Kingdom is likely already back in recession and may see unemployment approach three million before the end of the year, economic think tank the Ernst & Young Item Club forecast on Monday.

The Item Club’s winter forecast said political uncertainty in the euro zone had paralyzed the UK’s economic recovery and that it expected UK gross domestic product to flatline for the rest of year.

Deteriorating levels of confidence would see business investment stagnate in 2012, while export prospects have already slowed, added the quarterly report. It said the UK was probably already in the grip of a “technical recession” and would struggle to reach positive growth until 2013.

The gloomy forecast is a far cry from the predictions of the Office for Budget Responsibility (OBR), the British government’s independent economic forecaster. The OBR sees GDP advancing by 0.7 percent in 2012 and by 2.1 percent in 2013, according to forecasts published in November last year.

The Item Club forecasts UK GDP advancing by just 0.2 percent this year before increasing by 1.8 percent in 2013 and by 2.8 percent in 2014.

“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,” professor Peter Spencer, chief economic advisor to the Item Club said in a statement.

The quarterly report also expects final investment for 2011 to show a fall of 2.6 percent in 2011 and suggests it will only grow by an anemic 0.4 percent in 2012.

Moreover, the outlook for employment is expected to worsen further still, with the Item Club suggesting sluggish levels of private sector recruitment that will be unable to plug the gap left by job losses in the public sector.

The report forecasts the unemployment rate will be a little short of three million by the first half of 2013, representing 9.3 percent of the UK’s workforce - the highest level since 1993.

Consumer Spending Weak

Meanwhile, disposable income in the UK is forecast to decline by 0.8 percent this year with consumer spending expected to remain flat before picking up by 1.4 percent.

“We are expecting to see another 300,000 unemployed this year, which is relatively modest when compared to the increase in 2009, but this is adding to an already lengthy dole queue,” Spencer said.

“The only piece of good news for UK households is that inflation should fall back below 2 percent this year, as commodity prices weaken and the VAT rise drops out of the calculation. We will have a bit of extra cash in our pockets, but concerns over rising unemployment are unlikely to see consumers rushing back out onto the high street.”

The UK’s continued dependence on exports will also be a factor in the year ahead, according to the report, which said exports added 0.9 percentage points to GDP in 2011 but warned weakening demand from the euro zone and concerns over China’s ability to slow its economy for a soft landing suggested the outlook for 2012 was far less positive.

The Item Club said it expected export growth of 3 percent in 2012, which would add 0.4 percentage points to UK GDP, but this would depend heavily on the UK’s ability to continue to move export trade away from the euro zone and into emerging markets.

“Many UK companies rely heavily on their euro zone trading partners but this is no time for ‘business as usual’; they will need to adapt, assess their long term business models and be prepared to tap into new markets,” Martin Cook, commercial managing partner at Ernst & Young said.

“Corporates need to start planning for different scenarios, as no-one really knows how the euro zone crisis is going to play out. Doing nothing is simply not an option.”

Spencer added that the current economic forecast was based on the “assumption the euro remains intact” and “that policymakers are able to contain the euro zone crisis.” But he warned the longer uncertainty continued, the more debilitating the effects on the UK economy.

The report comes just days after ratings agency Standard & Poor’s cut the credit ratings of nine euro zone member statesincluding stripping France of its triple-A and a two notch downgrade for Italian sovereign debt.