Oct. 15 (Bloomberg) -- Britain’s economy will shrink this year as weakening global demand offsets an improvement in consumer spending, hampering the government’s deficit-reduction plans, according to the Ernst & Young ITEM Club.
Gross domestic product will fall 0.2 percent this year and rise 1.2 percent in 2013, the London-based group said in a report today. It previously forecast stagnation this year followed by 1.6 percent expansion. While consumer spending will propel growth in the second half, the euro-area crisis remains a threat, it said.
Britain is struggling to recover from a recession, which has reduced tax receipts and put pressure on Chancellor of the Exchequer George Osborne’s budget plans. The International Monetary Fund cut its 2012 global growth forecast to 3.3 percent last week, which would be the weakest since 2009.
“With exports being battered by the euro-zone crisis and a weakening outlook in markets such as the U.S., India and China, the U.K. is relying heavily on the high street to come to the rescue,” said Peter Spencer, chief economic adviser to ITEM Club. While the fundamentals “are in place,” it’s “not the balanced, long-term sustainable growth we were hoping for.”
Consumer spending will rise 0.6 percent this year and 0.8 percent in 2013 as disposable income increases, ITEM Club forecasts. Exports will increase 0.6 percent in 2012, though net trade will subtract from GDP.
The report noted the signs that credit conditions are easing after the Bank of England and the government introduced their Funding for Lending program to boost lending in August.
“One of the biggest headwinds facing the U.K. has now begun to ease -- lending has started to loosen up,” Spencer said. “The big question is the extent to which consumers will choose to grasp the opportunity or continue to deleverage and to pay down their debts.”
The ITEM Club also forecast that Osborne is set to miss his borrowing target this year. The deficit will decline at a slower pace in the coming years than the Office for Budget for Responsibility has projected, it said. Osborne is due to publish the Autumn Statement, in which the government updates its fiscal and economic forecasts, on Dec. 5.
If the OBR judges this shortfall to be structural it would “effectively compel the chancellor to introduce further austerity in order to comply with his fiscal mandate,” ITEM Club said. “However, in our view this would be difficult to justify and we would argue that any shortfall is more likely to be a function of weak demand than any damage to the supply side of the economy.”
Separately, Lloyds TSB said the squeeze on consumers’ finances is continuing, with discretionary real spending power falling 0.9 percent in September from a year earlier. U.K. inflation probably slowed to 2.2 percent in September from 2.5 percent in August, economists said in a survey before a report tomorrow. The Lloyds report said annual income growth was less than that, at 1.7 percent.
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