U.K. GDP Forecast Cut as Crisis Wreaks Damage, Item Club Says

The U.K. economy won’t grow this year as damage from the euro-area debt crisis overshadows a pickup in consumer spending in the second half, the Ernst & Young Item Club said.

The London-based group, which uses an economic model similar to that of the U.K. Treasury, cut its 2012 gross- domestic-product forecast to show no expansion instead of a 0.4 percent increase predicted in April. Growth will pick up in the second half after quarterly contractions that extended into the three months through June, it said in a report today.

That last assessment chimes with a 0.2 percent GDP drop estimated by the National Institute of Economic and Social Research. The Bank of England and U.K. Treasury unveiled details of their Funding for Lending Scheme on July 13, the latest attempt by officials to kick start growth and protect the economy from the euro turmoil by encouraging banks to offer more loans.

“The euro-zone crisis remains a major risk to the forecast,” said Peter Spencer, economic adviser to the Item Club. Slowing inflation means “the boost to household finances and the subsequent pickup in spending should be enough to push the U.K. back into positive territory this year, but don’t expect a consumer-led recovery further out.”

Spencer said that the squeeze in wages caused by inflation in the past four years is “almost over.” Consumer prices probably rose an annual 2.8 percent in June, matching the slowest pace since November 2009, according to the median forecast of 30 economists in a Bloomberg News survey. That data will be released tomorrow.

Growth Forecasts

Spencer forecast growth of 1.6 percent in 2013 and 2.6 percent in 2014. He said that U.K. business confidence may improve after a crisis summit of European leaders last month, when they pledged to enact new budget rules.

“It is just possible that the EU summit in June, together with the tough new fiscal rules agreed in December, have laid the foundations for a gradual revival of business confidence -- providing the proposals go ahead as planned,” he said.

House prices will fall 2 percent this year, leaving them 8 percent below the 2008 peak in nominal terms, and down 24 percent in real terms, the Item Club said.

To contact the reporter on this story: Craig Stirling in London at cstirling1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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July 16 (Bloomberg) -- Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., talks about the outlook for the pound, dollar and yen. He spoke July 13 with Bloomberg's Niki O'Callaghan in London. (Source: Bloomberg)