U.K. Faces ‘Sluggish’ Economic Growth on Weak European Demand

Britain’s economy will grow less than previously forecast this year and further bond purchases by the Bank of England may do little to stimulate the recovery, according to the Ernst & Young Item Club.

Gross domestic product will rise 0.6 percent, compared with a January forecast of 0.9 percent, the London-based group said in a report today. Growth will accelerate to 1.9 percent next year and 2.5 percent in 2015, in line with previous estimates.

“With the rebalancing of the U.K. economy on hold, we’re once again relying on the consumer to see us through,” Peter Spencer, chief economic adviser to the Item Club, said in a statement. “Unless we see a dramatic turnaround in Europe, U.K. growth is likely to remain sluggish at best.”

The government’s austerity program and the continuing recession in the euro area have hurt Britain’s recovery. Chancellor of the Exchequer George Osborne pledged 3.5 billion pounds ($5.4 billion) in his budget last month to boost the housing market, while he revamped the Bank of England’s remit to give it greater flexibility to add to stimulus.

Item said that the fiscal changes were “active and intelligent,” though it expressed doubt “about the scope for a more innovative monetary policy.” It forecasts that the BOE’s bond-purchase target will be raised by 25 billion pounds in both May and in August, adding that the stimulus is likely to be less effective than the Funding for Lending Scheme, set up last year to boost credit.

The Bank of England has already bought 375 billion pounds of gilts and kept the program unchanged this month.

“There are increasing signs that the ground is being prepared for further stimulus,” Item said. “However, we feel that this is unlikely to provide much support.”

Housing Support

The U.K. Treasury said the government “is committed to building a stronger economy.”

The FLS has “already been a significant factor in the improvement in the housing market” and the new budget measures “will support those who are looking to get on or move up the housing ladder,” it said in a statement.

Osborne’s measures to boost the housing market will likely help the U.K. avoid another recession, according to Item.

“Although it’s not a long-term strategy, stimulating the housing market and the high street will keep GDP growth positive,” Spencer said. “Unbalanced growth is better than no growth.”

-- Editors: Fergal O’Brien, Craig Stirling

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

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

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