No Happy New Year for UK as Gloom Worsens

Scott E. Barbour | The Image Bank | Getty Images

With gloomy economic forecasts, falling consumer confidence and poor retail figures adding to concerns over talk of the U.K. leaving the European Union, 2013 is set to be a tough year for the country, analysts say.

The U.K.'s spirits had been lifted in November by news that the economy had exited recession in the third quarter with a jump in gross domestic product of 1 percent quarter-on-quarter. However, the latest consumer confidence survey showed a reversal in that improvement.

Consumer sentiment for December plunged to -29 this month from an 18-month high of -22 in November. Economists' had forecast a reading of -25. Consumer price inflation (CPI) was also back up to 2.7 percent in November after falling to a 34-month low in September.

No Christmas Lift for Retailers

The marked relapse in consumer confidence in December is particularly worrying news for retailers given the importance of sales over Christmas," Dr Howard Archer, chief U.K. and European economist at IHS Global Insight said in a report on the figures.

"It is also worrying for hopes that consumers can play a leading role in helping the economy develop sustainable growth," he said.

Archer attributed the reversal in the U.K.'s consumer sentiment to "pessimism over the economy's recent performance." In fact, Chancellor George Osborne's autumn statement conceded that the U.K. was not recovering as quickly as hoped.

(Read More: Triple-Dip Recession Looms)

Earlier this week, the Confederation of British Industry (CBI) released data showing that retail sales growth for the Christmas season had slowed in December prompting fears for 2013 retail prospects as well. The CBI's head of economic analysis,Anna Leach said that the figures did not bode well for the new year.

"Weak spending power and uncertainty over the economic outlook are likely to remain key risks to the retail sector in 2013."

"There's been a lot of discounting in the high streets because the shops are trying to shift stock and it's not working," Jane Foley, senior currency strategist at Rabobank, told CNBC.

"We've got to remember that austerity in the U.K. is due to step up next year," she said,a factor that would only help to further erode household budgets and spending.

Inflationary Pressures

Foley told CNBC that growth had been disappointing mainly due to inflation and low wage growth.

"[Inflation] took money out of our pockets and made our real wages negative. Many economists were anticipating that by now we would have positive wage growth but no, again we have sticky inflation and inflation at high levels because of university fees and utility bills going up."

Wage growth has been modest in the U.K (taking inflation into account they are the same as 2007) and lower than the rate of inflation, squeezing already tight household incomes and budgets.

(Read More: A "Good" Recession for the UK? )

The U.K.' s "Average Weekly Earnings" index showed that wages climbed an annualized 1.8 percent while consumer and retail price index figures were up 2.7 and 3 percent respectively on a year ago.

The Bank of England's latest quarterly report has found that over 11 million households are"very concerned" about their debts. "Incomes have been broadly flat over the past year and rises in prices will have eroded the spending power of that income,' the report released last week found.

The Bank also warned that the U.K.'s economy is set to contract in the final quarter of 2012 after poor manufacturing output data was released in December.That data from the Office for National Statistics showed a drop of 1.3 percent from September to October. Total industrial output also fell 0.8 percent – the third consecutive fall in the same period.

Capital Economics forecast that a revival in the U.K. economy was improbable in 2013.

"Over the past five years,the U.K. has already been through the three Rs – recession, recovery and relapse. Unfortunately, the fourth – revival – is not in sight yet. We expect the recent stagnation in the economy to continue in 2013," Capital Economics said in a research note.

EU Tensions

Adding to the gloomy forecasts is the political tensions that are rising between the U.K.and European Union. This week, Prime Minister David Cameron admitted that leaving the EU was "imaginable", the first time he has recognized that the U.K.could possibly divorce itself from the political and economic union with the continent.

Saying that the U.K. was in charge of its own "destiny," Cameron is expected to set out plans next month fora referendum on British membership of the EU, though he has said he supports remaining a member state.

Cameron's comments have caused consternation on both sides of the Atlantic. President Obama reportedly called the prime minister to reiterate the importance of the U.K. remaining within the EU. The former president of the European Central bank, Jean-Claude Trichet also told CNBC it was in the interests of the U.K. to remain within the union.

"There maybe voices that are calling for the U.K. to leave the European Union but it is not in the interest of the U.K.," Trichet said.