Pace of recovery losing momentum but double-dip fears 'exaggerated'

The Ernst & Young Item Club predicts GDP growth of 1.4 per cent this year and 2.2 per cent in 2011, but said the recovery will face a "soft patch" in the months ahead.

The group, which bases its forecasts on the Treasury's economic model, said it was "hardly surprising" that policymakers at the Bank of England were considering pumping more cash into the economy in the wake of Chancellor George Osborne's spending review, to be revealed later this week.

Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "The economy is likely to slow over the winter following a surprisingly positive first half of the year, but I think this will be a soft-patch, not a double-dip."

Professor Spencer, of the University of York, said once the spending review is revealed, the climate for businesses should relax as the uncertainty over where the Chancellor's axe will fall will be over.

He forecast business investment to increase by 1.8 per cent this year and accelerate to nine per cent in 2011.

Prof Spencer said: "Wednesday's announcement should peel away another layer of uncertainty from the economic outlook and encourage businesses to loosen the purse strings, in much the same way that the formation of the coalition Government and the June Budget did earlier this year.

"Helping the UK out of recession has been a bit like peeling back an onion – removing one-by-one the risks to the economy in order to rebuild business confidence."

But the outlook for consumers is still "bleak", Prof Spencer added, with the squeeze on spending set to continue.

"Low wage growth and rising unemployment combined with the prospect of high inflation until at least the end of next year, means that the average UK household is in for a tough time," he said.

Despite Item's prediction the UK economy will avoid a double-dip, it is more wary on the housing market.

Prof Spencer said: "Household spending – despite showing some resilience this summer – is likely to buckle under the unrelenting pressure on disposable incomes, with credit remaining tight and the housing market now double-dipping."

Looking ahead, the group said real improvement in the UK economy will not come until the end of 2011.

He said: "Economic recovery really is dependent upon the extent to which business and services organisations, whether they are in education, entertainment or whatever, can increase their overseas income flows as the home market stagnates."