Forecasters predict painful decade of readjustment

The UK economy has moved out of a decade of debt and into a decade of painful readjustment, according to Ernst & Young Item Club.

In a report out today, the forecasting group said the bounce-back so far has been driven by car scrappage, Chancellor Alistair Darling's VAT cut, and factory restocking, and future recovery will depend on exporters' success in winning new business from Asia.

The group, which bases its forecasts on official Treasury models, predicts that growth will struggle to reach one per cent in a "challenging year".

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Chief economic adviser Prof Peter Spencer, from York University, said: "We are no longer in a position to borrow – the massive debts that we racked up in the last decade now need to be repaid."

Official figures due later this month should confirm a pull out of recession in the final three months of 2009 but the group put this down to emergency measures such as the "cash-for-bangers" scrappage scheme.

"Once the effects of these temporary stimuli have worn off, it is difficult to see where the growth is going to come from in the short-term," Prof Spencer added.

Item said the country had to boost exports over the long-term to avoid the risk of economic stagnation. "It is vital the UK rejuvenates its overseas investment model and starts selling into countries such as China, where we have an exceptionally low market share compared to our leading competitors."

Interest rates have been at a record low of 0.5 per cent since March last year and the forecaster expects them to remain at this level until "well into 2010".

Item added that it "remained concerned" over the UK's dire public finances, with net borrowing set to soar to a record 178bn this year.

The forecaster said official forecasts were based on "very optimistic" assumptions for tax revenues and growth, while the Chancellor had also failed to set out "credible" plans for fiscal consolidation.