‘Slow and steady recovery’ on the cards for the UK, Item Club predicts

By JAMIE GRIERSON and ERIKKA ASKELAND
Published on 28/05/2012 00:00

There is “light at the end of the tunnel” for hard-pressed Brits after five “torrid” years, a key forecasting group said yesterday.

The average earner will see their finances bolstered by an additional £482 this year and £624 in 2013, according to a special report on consumer spending by the Ernst & Young Item Club.

Provided oil prices continue to ease, inflation is likely to move back towards the UK government’s 2 per cent target by the end of the year, from its current level of 3 per cent, bringing prices into line with wages, the Item Club said.

Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club, said: “After the tightest squeeze on consumer incomes in a generation, the worst is now behind us and most people should start to feel a bit better off by the end of the year.”

Wage growth will finally begin to outpace inflation, while pay packets will also be boosted by the tax changes announced in the Budget, the report said.

Spending growth is forecast at 0.8 per cent this year and 1.1 per cent in 2013, but the Item Club warned that high streets will still see a slow recovery as consumers pay down debt.

Goodwin added: “It’s an improving outlook for the UK high street but it’s going to be a slow and steady recovery. Rather than splashing their cash, we’re expecting to see conscientious consumers keeping a relatively firm grip on their purse strings.”

But the forecaster predicted that audio visual goods – a sector which includes TVs, mobile phones and broadband – will continue to perform strongly as “rapid” advancements in technology and falling prices will underpin strong demand.

However, Goodwin said: “We still need to keep our fingers tightly crossed. The eurozone crisis continues to cast a long shadow and consumer confidence could easily take another hit if the situation worsens, particularly if unemployment nudges up.

“We are optimistic, but conditions on the high street will remain fairly fragile until a more sustainable recovery takes hold.”

l There were more optimistic findings in a survey of British services firms yesterday, which found confidence rose to the highest level in a year in May. The respondents also forecast a pick-up in business in the next three months, according to the quarterly poll by the Confederation of British Industry (CBI).

The survey offers hope that stronger growth in the dominant services sector will help prevent another economic contraction between April and June, which would pull Britain out of its second recession since the 2007-08 financial crisis.

The sentiment measurement for the current business situation rose to -2 from -9 in February for consumer service providers and to +8 from -8 for business and professional service firms – both the highest readings since May 2011, the business lobby said.

The improvement was particularly striking for consumer service firms, a sector which includes hotels, restaurants and travel agents. Respondents expected business volumes to rise for the first time since August 2010, with the relevant measurement jumping to +12 from -21.

And although their volumes fell in the past three months, the pace of the decline was the slowest since February 2011.