UK 2012 Growth 'Dismal' as Business Holds back from Spending - Ernst & Young

Britain's economy has narrowly avoided a recession but growth will be even lower than the "depressing" 0.7 percent in 2011, as businesses hoard rather than spend cash, according to forecasts by a leading accountancy group.

UK business spending will remain "paltry" and consumers will be hit by rising energy bills, said Ernst & Young's ITEM Club spring forecast for the UK economy, despite quantitative easing by the Bank of England - ensuring 2012 growth will be "dismal".

"A UK recession may have been averted, but this year's growth is likely to be lower than last year's depressing 0.7 percent," the report said.

It predicts 0.4 percent growth in 2012, before rising to 1.5 percent in 2013, and holding steady at 2.6 percent in 2014 and 2015.

Business investment in the UK is also predicted to grow at around 1.2 percent, around 12 percent lower than in 2008.

This is despite action by the Bank of England to pump billions of pounds into the British economy by buying up gilts from businesses, in order to improve liquidity in the markets.

Businesses say limited demand, volatility and unrealistic vendor expectations are holding back their spending.

"Consequently, the economy is bleeding cash into company coffers at an alarming rate," the report said.

"This haemorrhage is sapping the strength of the economy, keeping it on the critical list. Although the forecast sees business investment growing by 6 percent next year and a further 10 percent in 2014, this will not be sufficient to get the economy moving rapidly.

"The corporate sector is accumulating cash at an astonishing and accelerating pace and acting as a major drag on the rest of the economy, keeping it close to stall speed," the report added.

"It is hard to see any strong revival in the economy until companies start to release this cash by spending more on acquisitions, investment or dividends."

Growth in consumer spending and average earnings will be weak over the next two years, with modest rises in both.

Just as the UK is suffering, much of Europe, Britain's biggest export market, is in a worse position with no end in sight for the sovereign debt crisis.

"The reasons for this dismal picture are obvious and inescapable," the report said.

"As a nation we have been living beyond our means and need to adjust.

"Austerity is the word of the day, not only in the UK but also our major European export markets."