Eurozone turmoil ‘bringing paralysis to UK recovery’

It predicts business investment will stall in 2012, while export prospects have already slowed. It believes the UK will struggle to reach positive growth until 2013 – but is not forecasting a deep double-dip recession.

The ITEM Club forecasts UK output of just 0.2 per cent this year before increasing to 1.8 per cent in 2013 and 2.8 in 2014.

Peter Spencer, professor of Economics and Finance at the University of York and chief economic adviser to the 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 eurozone faces fresh turmoil after the credit worthiness of France and eight other eurozone nations was downgraded by a leading ratings agency on Friday.

In a new blow to the struggling single currency, Standard & Poor’s (S&P) stripped France of its AAA credit rating, 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.

Prof Spencer added: “Our forecast is based on the assumption that the Euro remains intact and that policymakers are able to contain the eurozone crisis. However, the longer the uncertainty continues, the more debilitating the impact will be on the UK’s economic prospects.”

ITEM predicts UK export growth of three per cent this year, which will add 0.4 percentage points to UK GDP.

But it said this will be dependent on the UK’s ability to continue to re-orient exports away from the eurozone to the rapid growth markets, such as India and Indonesia.

Martin Cook, commercial managing partner at E&Y, said: “Corporates need to start planning for different scenarios, as no one really knows how the eurozone crisis is going to play out.

“Doing nothing is simply not an option.”

The ITEM Club forecasts business investment fell by 2.6 per cent in 2011 and will grow by just 0.4 per cent in 2012.

“This time around, UK PLCs have strong balance sheets and have built up large cash stockpiles, which will provide a useful insurance policy if the situation deteriorates further,” said Prof Spencer.

“Business spending has already been cut back heavily. However, with business confidence faltering, investment and recruitment are likely to remain on hold until stability returns.”