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E&Y ITEM Club Says U.K. Economy Back in Recession, Cuts Forecast

Ernst & Young LLP’s ITEM Club said the U.K. economy has slipped back into a recession and the Bank of England will increase its bond-purchase target in February to counter the sovereign debt crisis in Europe.

The economy will probably shrink in the current quarter after contracting in the last three months of 2011, the research group said in a report in London today. It also cut its 2012 growth forecast to 0.2 percent from 1.5 percent. In a separate report, manufacturers’ group EEF forecast 1 percent expansion this year.

Some Bank of England policy makers have said more stimulus may be needed as Europe’s debt crisis and budget cuts by Britain’s government restrain growth. Citigroup Inc. and Royal Bank of Scotland Group Plc are among banks forecasting an additional loosening of policy next month.

Data “are likely to show that we are back in recession and we are going to have to wait until this summer before there are any signs of improvement,” Peter Spencer, chief economic adviser to the ITEM Club, said. “However, the longer the uncertainty continues, the more debilitating the impact will be on the U.K.’s economic prospects.”

ITEM Club forecasts that economic growth will accelerate to 1.8 percent next year and 2.8 percent in 2014. As well as raising the ceiling of its asset-purchase plan, currently at 275 billion pounds ($421 billion), the Bank of England will hold its benchmark interest rate at a record low of 0.5 percent until the first half of 2013, the group said.

ITEM Club said its predictions assume the turmoil in Europe, the U.K.’s biggest trading partner, is “successfully negotiated.” Standard & Poor’s cut the ratings of nine euro-area sovereigns, including France, on Jan. 13, citing “insufficient” policy steps to combat the debt crisis. Germany was left with the region’s only stable AAA rating.

The EEF said in its report that the “most dominant risk” to the economy this year is the debt crisis in Europe. Still, it expects expansion “to be underpinned by growth in net trade and investment, against a backdrop of weak consumer and government spending.” It sees growth accelerating to 2.6 percent in 2013.

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