Chilly winter looms but 'double-dip fears overcooked'

The economy has bounced back from recession after a surprisingly strong first half of the year, according to the latest quarterly report from the Ernst & Young Item Club.

However, it predicts that the recovery will hit a "soft patch" in the coming months, with the prospect of a double-dip in the housing market.

The report forecasts GDP growth of 1.4 per cent this year and 2.2 per cent in 2011, but cautions that while the likelihood of a double-dip recession in the UK has been "exaggerated", the outlook for the economy remains uncertain.

The club believes that while inflation will drop below government's 2 per cent target by January 2012 as next year's VAT increase works its way out of the system, interest rates will remain low until 2014.

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."

The economic recovery us unlikely to gather pace until late 2011, with the risk that this week's spending review could take demand out of the economy.

However, the spending review on Wednesday, when Chancellor George Osborne will outline the government's planned spending cuts, will end months of uncertainty for businesses, said Spencer, who forecast that business investment would rise by 1.8 per cent this year and by 9 per cent in 2011.

"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," he said. "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."

Export growth is predicted to slow down this winter before going on to outstrip imports in 2011. But the squeeze on consumers is unlikely to ease, Spencer added, due to low wage growth, rising unemployment and persistently high inflation.

Real disposable incomes are due to fall by nearly 1 per cent this year, according to the report, with little recovery expected in 2011.

"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," said Spencer