ITEM Club sees a sustainable UK recovery

The Ernst & Young-sponsored forecasting group ITEM Club has said it expects the UK to grow 1.1 per cent this year – a big jump from the 0.2 per cent rise in 2012 – thanks largely to improvements in domestic consumer confidence and the housing market.

The recovery this time “looks much more sustainable”, and should be held up by a rebound in business investment and exports from 2014, the analysts say. They predict a growth acceleration to 2.2 per cent next year and 2.6 per cent in 2015. It would take “a major crisis” to halt recovery this time around.

While the UK’s main export markets remain weak and a near-term rebalancing looks unlikely, the analysts say a pick up in the global economy and a strong US recovery in particular should open the door to improvement and a reduction in the current account deficit. Consumer spending is expected to continue rising to 1.7 per cent this year from 1.1 per cent in 2012, before growing again to 1.9 per cent in 2014 and 2.4 per cent in 2015 to 2017.

With regards to the housing market, household debt is now “much better aligned” with personal incomes pushing consumers into spending rather than saving, supported by the Treasury’s “well-timed initiatives to revive the mortgage market”. The analysts expect national house price growth of 2.25 per cent in 2013 and 5.5 per cent in 2014.

The analysts praise the forward guidance policy of new Bank of England governor Mark Carney (whereby interest rates are kept low for a prolonged period), but were less complementary of the chancellor's 2013 spending round. They think fiscal policy is being tightened too aggressively, and suggest an additional £10bn of extra capital spending would boost growth by 0.5 percentage points each year to 2015.