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Item club's spring forecasts show the economy growing by 1.8% this year and unemployment edging up to 8.3% in early 2012
A premature rise in interest rates – before a recovery in Britain's corporate sector is fully under way – could have "disastrous" consequences, warns the Ernst & Young Item Club.
The economic forecasting group's spring forecasts show the economy growing by 1.8% this year, held back by the effects of austerity measures and high inflation on consumer spending. Households' real disposable incomes (adjusted for inflation) are expected to fall for the second year running – a trend last seen in the mid-1970s – while unemployment is forecast to edge up to 8.3% in early 2012.
Peter Spencer, the Item club's chief economic adviser, cautions against raising interest rates too soon. "A rate rise would be perverse at this stage, merely adding to the already intense pressure on UK consumers, as well as increasing the retail prices index and risking a rise in wage settlements. Companies hold the key to UK growth, and a premature rate rise could easily break the key in the lock."
A separate survey from Markit shows a further steep decline in household finances this month and record levels of pessimism, particularly among public sector workers whose jobs are under threat.
Spencer adds: "Unlike the European Central Bank, the Bank of England hasn't yet seen any core strength in the UK economy. Manufacturing seems to be performing well, but is too small to get us very far. Our forecast assumes that the monetary policy committee will keep interest rates on hold until November this year – when a revival should be evident."
The comments come amid fresh evidence that the housing market is slowing down as would-be buyers struggle to raise the necessary finance. The latest monthly survey from property website Rightmove shows Britain's estate agents have seen the biggest increase in unsold stock since May 2007 – from 70 to 74 properties per branch – suggesting sellers will have to lower their prices. At the same time, demand from cash-rich buyers in London has pushed asking prices in the capital to an all-time high – up 1.6% in April taking the average price of a home to £431,013. Across the UK, asking prices grew by 1.7% to £235,822 in April but Rightmove reckons this is over-optimistic given that increased sellers' numbers are not matched by a rise in purchasers' ability to buy.
"We are approaching a 'tipping point' in the UK housing market where sellers will have to drop their asking prices hard and fast if they really want to sell," says Nick Hopkinson, director of PPR Estates. "This latest data from estate agents shows that despite their blind enthusiasm and sellers' home equity fantasies properties just aren't selling at anything like their asking prices anymore. Only the multi-million pound prime London market, which effectively operates in a parallel universe with completely different supply and demand dynamics to the rest of the UK, is showing any significant sales activity."
The Item Club is more optimistic about the next two years when economic growth is seen picking up to 2.3% and 2.7% assuming inflation slows, allowing household incomes to stabilise.
With prospects of a consumer-led recovery clearly non-existent at the moment, Spencer says that the stage is now set for a major revival in business spending and forecasts that businesses investment will increase by 12% this year.
Spencer says: "We have long maintained the view that UK Plc's must play a central role in the UK's economic recovery. The importance of companies releasing some of the cash they have stockpiled over the recession cannot be underestimated. Their spare cash flows equate to nearly 7% of GDP. And with consumers still under pressure, we're unlikely to see a durable recovery until UK Plc starts increasing investment or returning profits to shareholders through dividends."
The Item Club also believes that the improving world outlook will translate into growth of UK exports, and forecasts exports will rise by 9.9% this year. Exports are already back to pre-recession levels.