Item Club warns of euro zone crisis impact

| October 17, 2011

Leading think tank, the Ernst & Young Item Club, has warned that growth within the UK economy is “grinding to a halt” because of the euro zone debt crisis.

The Item Club also warned that the quantitative easing (QE) measures, announced recently by the Bank of England, are unlikely to boost the recovery.

Its comments come just a week after the British Chambers of Commerce (BCC) said the fresh round of QE may not be enough to prevent the economy from slipping back into recession and “more radical measures” are required.

At its rate-setting meeting earlier this month, the Bank said it will pump a further £75 billion via its QE scheme after injecting £200 billion into the economy in November 2009.

QE, also known as printing money, is a process used for buying Government bonds or other financial assets.

The BCC said the pace of the UK recovery “will remain slow” and a recession can be avoided but this means the Government must make “some tough policy choices”.

Returning to the Item Club, the independent forecaster downgraded its forecast for UK economic growth to just 0.9% this year – way below the 1.4% it predicted three months ago and lower than other forecasts made by economists.

However, it said growth should improve to 1.5% in 2012, albeit this is much lower than the 2.2% it previously estimated.

Peter Spencer, the chief economic adviser to the Item Club, said: “It’s worse than we thought. The bright spots in our forecast three months ago - business investment and exports - have dimmed to a flicker as uncertainty around Greece and the stability of the Eurozone increases.

“With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track,” he added.

The Item Club, meanwhile, is forecasting that UK unemployment will increase to 2.7 million people by the spring of 2013, adding that there should be more support for the labour market.

The latest comments will add further pressure on the Chancellor, George Osborne, to stimulates the economy.

Finance ministers from the G20 nations spent the weekend in Paris discussing the euro zone crisis.

European leaders will meet next weekend for a summit which is expected to outline a rescue package worth up to €2 trillion.

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