UK economy to see a return to growth

The Ernst & Young Item Club has said in its latest quarterly forecast that falling inflation and a pick-up in consumer spending will help the UK return to growth.

The forecast expects the inflation rate to fall to 1.7 per cent by the end of the year but overall growth to remain flat in 2012.

Chief economic advisor to the Item Club, Peter Spencer, said: “Spiralling inflation has cut real wages by 7.5 per cent over the last four years, but the squeeze is almost over. Inflation is now coming back to heel, helped by the chancellor’s decision to postpone the increase in fuel duty, falling energy and commodity prices, plus tax changes dropping out of the calculation.”

Real disposable incomes are consequently expected to increase by 0.4 per cent in 2012 and by 1.5 per cent in 2013, but the unemployment rate could still hit 8.6 per cent by the end of the year and 8.7 per cent in 2013.

Although the Item Club is forecasting business spending to grow by 3.4 per cent in 2012, they say it is unlikely to go back to pre-recession levels until 2015.