The good news is that the UK will not experience a serious double dip recession in 2012. The bad news is that as a result of the Eurozone crisis the UK is currently in recession and likely to remain so until the second half of the year when falling inflation should provide a platform for a consumer recovery. It is uncertain what level of growth the UK will experience in 2012. For example economists at Standard Chartered bank said the economy will decline by 1.3% in 2012, having previously predicted growth of 0.6%. On the other hand the independent Office of Budget Responsibility project growth of 0.7%, yet that was downgraded from 2.5%. Whereas Ernst & Young ITEM Club forecast growth of Gross Domestic Product (GDP) of just ¼ %. One thing is certain the economy faces a bleak 2012.
After reaching a peace-time record, the government have sought to aggressively reduce the budget deficit with spending cuts and higher taxes. However, the deficit has fallen slower than expected because of weaker growth and corresponding weaker tax receipts. In the 2010 budget the Government projected spending to fall to 40% of GDP by 2015-16. In 2012, the government is likely to miss its targets for deficit reduction. Indeed already the total debt figure equates to 62.3 per cent of GDP, up from 56.5% in 2010.
Chartered Institute of Personnel and Development (CIPD) forecasts that the number of people in work in the UK will fall by 120,000 in 2012 with unemployment rising to 2.85 million.
In 2011, CPI inflation reached 5.2%. RPI reached 6%. However the Bank of England forecast a sharp fall in inflation during 2012. This is because in 2011, inflation was caused by temporary cost-push factors such as a rise in VAT and rising commodity and food prices. Spending cuts, high unemployment and weak wage growth will prevent a rise in inflation. A global economic slowdown will weaken pressure on commodity prices. As a result by the end of 2012 inflation could fall below the government target of 2%.
With the above inflation forecast, it is highly unlikely that the Bank of England will increase interest rates in 2012. Some leading economists believe that interest rates will stay as low as 0.50% for a further two years.
Value of Sterling
We will see the sterling fluctuate as interest rates remain low. Indeed earlier this month the pound fell to a near one year low against the dollar. Nonetheless against its’ Euro counterpart the Sterling will fair well as the Eurozone crisis continues.
Analysts such as Ernst & Young predict a small fall in UK house prices during 2012. Demand for buying houses will remain weak because of high unemployment, recession and difficulty of getting mortgage finance. Yet despite poor affordability levels, a bigger house price fall will be avoided by lack of supply, which keeps prices artificially high.