Page last updated at 05:49 GMT, Monday, 19 October 2009 06:49 UK

'Too early' to declare recovery

Shoppers at the Bluewater shopping centre
The Item Club is concerned about what will happen when VAT rises in January

It is "still premature" to talk about the beginnings of a recovery despite growing optimism, according to the influential Ernst & Young Item Club.

It predicted some growth in the second half of 2009 but said the economy would struggle to achieve 1% growth in 2010.

The forecasting group blamed the weak growth on consumers repaying debt and tax rises after the election.

There was optimism from BT Business research, which found small businesses were optimistic about the coming year.

It surveyed more than 7,000 small businesses in September and found that 75% of them were expecting an upturn in 2010 and 61% were confident about the prospects for their businesses next year.

'Substantial pain'

But there was a stark warning for optimistic businesses from the Item Club's chief economist, Professor Peter Spencer.

"There could still be substantial pain to come for corporates and consumers," he said.

"For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening."

Part of the problem is that the forecast sees some of the growth in the rest of 2009 coming from people making purchases early to avoid the hike in VAT on 1 January, when it will return to 17.5% from 15%.

Next year will also see an end to the stamp duty holiday on housing, an increase in national insurance contributions, the introduction of the new 50p tax rate, the end of the car scrappage scheme and more restraint in government spending.

Prof Spencer told the BBC that recent economic data had been "very mixed".

"The stock market is absolutely rampant, industrial surveys all back in positive territory, but it's yet to show through in hard data for output and things like that," he said.

"And when it comes to lagging indicators like unemployment, I'm afraid its going to be 'feel bad' for quite some time to come."

Zero growth

Official figures for gross domestic product (GDP) between July and September are due on Friday and are expected to show economic growth near zero.

GDP measures the value of all the goods and services produced in an economy.

It has been negative in the UK since the first three months of 2008.

Prof Spencer is also not positive about the success of the Bank of England's policy of pumping cash into the economy - known as quantitative easing - saying little of the money appears to have ended up boosting bank lending.

"Instead, the banks appear to have used much of the money to rebuild reserves and improve liquidity," he said.

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