But Item forecast shows bleak outlook on jobs, weak spending and falling house prices will stall recovery over the winter
Britain's faltering recovery could stumble over the winter as the economy confronts a bleak unemployment outlook, weak consumer spending and a relapse in the housing market, one of the country's leading forecasting groups warns tomorrow.
The Ernst & Young Item club – which uses the Treasury's economic model to make its predictions – is likely to add to fears over George Osborne's deep cuts in public spending by suggesting that the private sector will struggle to absorb the hundreds of thousands of jobs shed by the public sector over the coming four years.
Osborne's plans involve withdrawing more than £20bn of spending power from the economy in each of the next four years to eliminate the record Budget deficit.
Peter Spencer, chief economist for the Item club, said that even though the bank rate was likely to remain at its emergency level of 0.5% for at least three years, consumers would "remain under the cosh". He added, however, that it was unlikely that the loss of momentum in the economy over the next six months would lead to a full-blown double-dip recession.
Item believes, after growing by just under 1.5% this year, the UK will post expansion of just over 2% in 2011. But it is concerned that the scale of the fiscal retrenchment – expected to shave 0.6 points off growth in each of the next four years – could be "too much too soon". "Anecdotal evidence suggests that investment is still being held back by uncertainty about public spending cuts, particularly in the public services industry," the Item report says.
But the quarterly study adds that Wednesday's announcements could clear the air: "This week's Comprehensive Spending Review should help clarify the outlook for the public finances. However, the health of the financial system and its ability to support the recovery still remains in doubt."
Osborne will tell parliament this week that a rebalancing of the economy towards investment and exports will allow the private sector to absorb public sector workers who lose their jobs. Job cuts are to be phased in over four years, but the Recruitment and Employment Confederation said at least 120,000 temporary workers had so far been laid off by the public sector.
The study says: "The short-term outlook for the labour market looks bleak. The cuts will soon translate into public sector job losses and the weakening business surveys suggest the private sector is too weak to provide the counterbalance."
Thus, as the spending cuts bite unemployment is likely to creep upwards and we expect unemployment on the ILO measure to edge up to 8.2% by mid-2011 and drop back very gradually thereafter.
"In addition, benefit reforms later in this parliament will make it important to find new ways of "absorbing large numbers of people who have been absent from the labour market and are likely to be in need of motivation and training. Otherwise, the mismatch between the demand and supply of labour will frustrate the government's plans and undermine the recovery."
Britain's budget deficit ballooned to 11% of GDP during the recession as tax receipts fell, welfare spending increased and the last government announced a mix of spending increases and tax breaks to boost growth. Osborne is planning to eliminate the structural part of the deficit – the estimated chunk of borrowing that will not disappear even when the economy is fully back to health by the end of the parliament.
Item says: "The plan to eliminate the budget deficit by 2015/16, mostly through aggressive spending cuts, represents a significant risk for the sustainability of the recovery, but the fact that the bulk of the tightening is planned for the second half of the parliamentary term, by which time the recovery should be firmly entrenched, gives us confidence the economy will be able to weather the tightening."
Copyright Speakers Corner 2016