UK set for 'dismal growth' as Item Club predicts 0.4% rate

Apr 16, 2012

Bank of England has done the right thing, but UK businesses are too risk-averse says report

THE BRITISH economy is set to face "dismal growth" for the rest of 2012 because big business is stockpiling cash, a report by independent forecaster the Ernst and Young Item Club has found.

The Item Club report, released today, predicts a 0.4 per cent growth for this year rising to 1.5 per cent in 2013 – only half the recent projection of 0.8 per cent rising to 2 per cent in 2013 given by the government's independent Office for Budget Responsibility.

The report says a lack of big business investment in Britain as the key reason the economy is set to stall.

"Business investment has picked up nicely in the US, but UK companies remain extremely risk-averse, which is sapping strength from the economy," said Professor Spencer, chief economic adviser to the Item Club.

The report praises the Bank of England's monetary policy over its increased measures for quantitative easing, which the Item Club found had "boosted" confidence in the economy. But, as the BBC reports, businesses have not been taking advantage of these measures. By continuing to "stockpile cash on their balance sheets at an accelerating pace" they are denying the economy the investment it needs to fuel growth.

"Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list," said Prof Spencer.

The report outlined a further future blow to the economy, predicting rising unemployment as government austerity measures continue to bite. It estimated that 9.3 per cent of the population - three million people - will be out of work by mid-2013 before the figure starts to contract. The estimate marks a leap from 8.4 per cent in current levels of joblessness.

The only solace the report offered was that British exports were performing well after rising in volume by 5.1 per cent in 2011.

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