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UK to Grow Less Than Expected, Consumers Suffer

The UK's economy will grow by just 1.4 percent this year, less than expected, according to the influential Ernst & Young ITEM Club report, released on Monday.

Big Ben
Don Klumpp | Iconica | Getty Images
Big Ben

The "Independent Treasury Economic Model" Club, which uses the UK government's models to forecast economic growth , has revised its 2011 gross domestic product growth estimates down from 1.8 percent to 1.4 percent as the soft patch in the country's economy looks set to continue even longer than anticipated.

Continued sovereign debt concerns in Europe are holding back investment, despite the weaker pound boosting the UK's exports, and the recovery in world trade.

“The UK economy has hit a critical juncture," said Peter Spencer, the chief economic advisor to the ITEM Club in a statement. "The risks to the world economy and the Eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy.

"The uncertainty about Greece and the EU periphery will continue to act as a damper on business investment in the UK, long held up as one of the torches that would light the way to recovery."

The need for soft landings in fast-growing emerging economies and persistent concerns over the US economy are weighing on UK businesses' appetite to invest, the report said. A British recovery is dependent on the strength of the country's exports, which are heavily exposed to conditions in world markets. As uncertainty continues, investors remain reticent.

"It’s certainly not about the cash, it’s about the commitment – investors and the business community are lacking the confidence to commit to investment," Spencer said. "The longer the soft patch extends the greater the risk of relapse in the UK labour market will become. But if confidence in the world economy grows this threat will quickly recede."

British consumers are facing a severe income squeeze, with both savings rates and consumer spending declining, according to the report. Real household disposable incomes will decline for the second year in a row, for the first time since 1976, the ITEM Club said. A 1.4 percent fall this year, on the back of a 0.8 percent slide in 2010 , the economists predicted.