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updated: 7/14/2012 9:00 PM

Analysts to cut Britain's GDP forecast

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  • An aerial view of the London 2012 Olympics summer games BMX bike track in the Olympic Park. The games come as England struggles to regain a robust economy.

    An aerial view of the London 2012 Olympics summer games BMX bike track in the Olympic Park. The games come as England struggles to regain a robust economy.
    Associated Press

Bloomberg News

The U.K. economy won't grow this year as damage from the euro-area debt crisis overshadows a pickup in consumer spending in the second half, the Ernst & Young Item Club will say.

The London-based group, which uses an economic model similar to that of the U.K. Treasury, will tomorrow cut its 2012 gross-domestic-product forecast to show no expansion instead of a 0.4 percent increase predicted in April. Growth will pick up in the second half after quarterly contractions that extended into the three months through June, it will say.

That last assessment chimes with a 0.2 percent GDP drop estimated by the National Institute of Economic and Social Research. The Bank of England and U.K. Treasury unveiled details of their Funding for Lending Scheme on July 13, the latest attempt by officials to kick start growth and protect the economy from the euro turmoil by encouraging banks to offer more loans.

"The euro-zone crisis remains a major risk to the forecast," Peter Spencer, economic adviser to the Item Club, will say, according to an e-mailed statement. Slowing inflation means "the boost to household finances and the subsequent pickup in spending should be enough to push the U.K. back into positive territory this year, but don't expect a consumer-led recovery further out."

Spencer will say that the squeeze in wages caused by inflation in the past four years is "almost over." Consumer prices probably rose an annual 2.8 percent in June, matching the slowest pace since November 2009, according to the median forecast of 30 economists in a Bloomberg News survey. That data will be released on July 17.

Growth Forecasts

Spencer will forecast growth of 1.6 percent in 2013 and 2.6 percent in 2014. He will say that U.K. business confidence may improve after a crisis summit of European leaders last month, when they pledged to enact new budget rules.

"It is just possible that the EU summit in June, together with the tough new fiscal rules agreed in December, have laid the foundations for a gradual revival of business confidence -- providing the proposals go ahead as planned," he will say.

House prices will fall 2 percent this year, leaving them 8 percent below the 2008 peak in nominal terms, and down 24 percent in real terms, the Item Club will say.

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