Firms must start spending if economy is to recover

Forecasting body the Ernst & Young Item Club said while monetary policy may have saved the UK from a double-dip recession, the economy will stall for the rest of the year, until a more sustainable recovery takes hold in 2013.

It said emergency measures from the Bank of England, the European Central Bank and US Federal Reserve have boosted confidence and stabilised financial markets, pulling the UK back from the brink of recession.

But the Item Club said the onus is now on UK companies to drive the recovery. It forecasts UK GDP growth will be 0.4 per cent this year, before rising to 1.5 per cent in 2013 and 2.6 per cent in 2014.

It said the cash balances of private non-financial companies are worth over £754bn, comprising 50 per cent of GDP, but business investment last year only increased by 1.2 per cent.

Prof Peter Spencer at the University of York and chief economic adviser to the Ernst & Young ITEM Club, said: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy.

“Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”

It predicts even if business investment grows by six per cent next year and 10 per cent in 2014, that will not be enough.

Item forecasts company financial surpluses are still expected to increase from 5.2 per cent of GDP in 2011 to 5.6 per cent in 2014.

However, Item said it will become increasingly difficult for private sector companies to create the jobs to offset losses in the public sector, as the Government’s austerity programme kicks in.

It expects unemployment to approach 9.3 per cent of the UK’s total workforce by the middle of next year, with nearly three million people out of work, before beginning to fall back.

Prof Spencer said: “Households remain under the cosh and UK unemployment is set to go even higher by the end of the year. But there is a small glimmer of light at the end of the dole queue. For the first time in years, the gap between wage growth and inflation should start to close, before reversing in 2013.

“This will feed through to the tills on the high street and will be given an additional boost by the Olympics. But make no mistake, consumers can’t lead this recovery.”