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U.K. Firms Should Stress Test for ‘Prolonged’ Slump, PwC Says

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July 12 (Bloomberg) -- U.K. businesses should prepare for the possibility of a “prolonged recession” if the crisis in the euro region worsens, PricewaterhouseCoopers LLP said.

While the economy will probably show zero growth this year, risks “are weighted to the downside,” the London-based accountancy firm said in an e-mailed report today. House prices may recover later in the decade, though real home values won’t return to pre-crisis levels before 2020, it added.

A worst-case scenario could see the economy contract this year and next as deepening turmoil in Europe erodes business and consumer confidence, PwC said. The Bank of England last week added 50 billion pounds ($78 billion) to its stimulus program to lift the economy out of its second recession since 2009.

“Businesses should be stress testing against the ‘prolonged recession’ scenario in particular given that this has severe potential implications for the prospects of a wide range of U.K. companies with direct or indirect exposure to the euro zone,” PwC said.

The U.K. housing market will remain “relatively flat” over the next two years before recovering later in the decade as confidence is gradually restored and credit conditions ease, the report said. “It could still be after 2020 before real house prices return to pre-crisis peak levels,” it said.

Economic growth should resume in 2013, with PwC forecasting 1.7 percent expansion. Consumer spending will grow 0.1 percent this year before increasing 1.3 percent in 2013 as lower inflation eases the squeeze on incomes, the report showed.

The report also outlines a “strong recovery scenario,” with the economy expanding 3 percent next year following a sharp pickup toward the end of 2012 as the euro-area outlook improves.

While the labour market points to a “slightly stronger” economic picture than that implied by official GDP data, the “the economy is likely to have weakened in the second quarter of 2012, even excluding the impact of the extra Diamond Jubilee bank holiday, given the difficult international environment with continuing high levels of uncertainty about prospects for the euro zone,” the report said.

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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