Page last updated at 12:01 GMT, Monday, 18 January 2010

UK economy faces decade of 'painful readjustment'

Mini cars waiting for export at Southampton docks
The report says the UK will need to increase its exports

The UK economy faces a decade of "painful readjustment" as it refocuses from debt-led consumer spending to increased exports, a study has warned.

That is the conclusion of the latest quarterly report from the Ernst & Young Item Club economic forecasting group.

"After a decade of relying on the domestic consumer, firms have to start chasing overseas customers," said Peter Spencer, its chief economic adviser.

The Item Club warns UK economic growth will struggle to hit 1% this year.

'Very challenging'

"The consumer is completely cashed out - with consumer spending likely to increase by just 0.4% this year," said Professor Spencer.

The UK's only hope of significant [economic] growth is a rebound in overseas exports and income - as well as inward investment
Professor Peter Spencer, Item Club chief economic advisor

"[Economic] growth is almost totally dependent on a sustained upturn in the world economy, and upon the energy and enterprise of UK exporters of our prized goods and services."

He added that this need for the economy to refocus from the domestic consumer to increased global trade was going to be "very challenging".

To help drive exports, Prof Spencer said the UK needs to focus on China "where we have an exceptionally low market share compared to our leading competitors", and other Asian countries.

However, on a positive note, the Item Club sees exports starting to pick up in 2011, when it predicts they will grow by 9%, rising to 10% in 2012.

'Difficult short term'

Despite official figures later this month expected to show that the UK exited recession between October and December, the Item Club warns that this was driven by a combination of temporary measures.

It said these one-off factors were firms restocking, the success of the government's car scrappage scheme driving exports, and increased consumer spending before VAT returned to 17.5% from 15% on 1 January.

"Once the effects of these temporary stimuli have worn off, it is difficult to see where the growth is going to come from in the short term," warns the Item Club.

Separately, the administration firm Begbies Traynor has warned that the withdrawal of temporary measures will see the number of corporate insolvencies rise in the second half of the year.

It said that insolvencies in the fourth quarter of 2009 were 14% lower than the same period of 2008 - thanks largely to government support measures.

The Item Club said the continuing economic recovery would be helped by low interest rates and modest inflation, but that a further rise in unemployment was likely.

"Unless the wider recovery turns out to be significantly stronger than we anticipate, some further increases in unemployment are still likely in the coming months - prolonging consumer caution," concluded Prof Spencer.

"The UK's only hope of significant [economic] growth is a rebound in overseas exports and income - as well as inward investment."

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