Short-term prospects for UK economy 'remain dismal'

AN influential economic forecasting body believes the outlook for the rest of this year remains "dismal", with export-led growth only likely to kick in from 2011.

In its latest quarterly forecast, the Ernst & Young Item Club said exports and other sources of overseas income will lead the economy through the recovery, as businesses tap into rapidly expanding Asian markets.

Item's chief economic adviser Professor Peter Spencer, of the University of York, said: "There are good reasons to be optimistic about exports and overseas demand. The competitive pound provides the carrot and the weak home market provides the stick.

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"The lack of domestic growth opportunities will force exporters and other organisations to seek overseas income streams, particularly in

Asia, while the weak pound makes UK output extremely competitive.

"The longer this situation continues the more obvious it will become that this is the way forward, both for businesses and the macroeconomy."

However, Item said an export-led recovery in the UK is only likely from 2011 onwards, as world trade is unlikely to regain its 2008 peak until the end of 2011.

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"The immediate prospects for the economy remain dismal and we still think the UK will struggle to achieve one per cent growth this year," said Prof Spencer.

Item added its growth forecast is at odds with the Treasury's more optimistic forecast. The Treasury has based its assumptions for UK economic recovery on a bounce back in home markets and increased consumers spending, rather than on exports.

Item, which stands for Independent Treasury Economic Model, uses the Treasury model to measure itself against Government forecasts.

With wage growth likely to remain subdued this year, Item believes pressures on consumers will intensify leaving real disposable income flat. It expects an increase in consumer spending of just 0.5 per cent this year.

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Prof Spencer said: "We remain concerned that the Treasury's forecast lacks precision. It is dependent upon a strong revival in domestic demand over the next two to three years, which appears unlikely in the current circumstances."

However, Item believes corporate spending could rise sharply from next year as refinanced companies invest in overseas expansion as well as new export capacity.