'Indian Summer' of Growth For Recession-Hit UK Economy: Ernst & Young ITEM Club

Britain's ailing economy, mired in its second recession in four years and requiring billions of pounds more in stimulus, will experience an "Indian summer" and grow in the latter half of the year, according to forecasts by leading accountancy firm Ernst & Young.

Rapidly falling inflation and a boost in consumer spending will drive the UK economy back to growth in the second half of 2012, Ernst & Young predicts in its ITEM Club financial outlook report, though this does not mean a full recovery and overall GDP will come in at zero for 2012.

"Longer term, consumers are going to be more focused on reducing their debt burden rather than splashing the cash," Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club, said.

Inflation, which fell to a near three-year-low of 2.8 percent in May, will drop sharply to 1.7 percent by the end of the year. It peaked at 5.2 percent in September 2011.

"Spiralling inflation has cut real wages by 7.5 percent over the last four years, but the squeeze is almost over," Spencer said.

"Inflation is now coming back to heel, helped by the chancellor's decision to postpone the increase in fuel duty, falling energy and commodity prices, plus tax changes dropping out of the calculation.

"The boost to household finances and the subsequent pick-up in spending should be enough to push the UK back into positive territory this year, but don't expect a consumer-led recovery further out."

Recent private industry data suggests the UK recession will extend into the second quarter of 2012, with slowing growth in the service sector and continued contraction in the manufacturing and construction sectors.

While growth will wipe its face in 2012, ITEM Club forecasts show 1.6 percent GDP expansion in 2013 and 2.6 percent in 2014.

This growth depends on the UK's export market improving and investment by businesses.

Both the value and volume of UK exports have plunged in recent months.

Non-EU exports to vital emerging markets such as China and India - whose own growth has been slowing recently - fell by 17.5 percent in value in April.

Meanwhile, the Bank of England is pursuing yet another multibillion-pound push to get banks lending to businesses in the hope that this will lead to investment in jobs and growth.

Under two credit easing schemes, called Funding for Lending and Extended Collateral Term Repo, the Bank offers British financial institutions cheap loans on the condition that they then lend to the wider economy.

This would offer a "significant financial incentive" to banks to free up affordable credit to consumers and businesses, said Bank of England governor Mervyn King, though he cautioned that there were "no guarantees" these efforts would work.

Banks might still find increasing lending too risky given the looming possibility of massive losses from the seemingly perpetual eurozone crisis, which threatens an economic catastrophe.

Rate-setters on the monetary policy committee (MPC) voted to inject another £50bn of quantitative easing into the UK economy, bringing the total of its programme - the asset purchase facility (APF) - to £375bn.

Under the APF the Bank buys up high quality assets, mostly gilts, from the market to improve liquidity.

This newfound cash for businesses, it was hoped, would then be used to invest, but a separate Ernsty & Young report found that they were hoarding the money instead, as they waited for the macroeconomic picture to improve.