Britain must change policy to drag UK out of economic hole

The Coalition lacks imagination on how to stimulate the economy, leaving countries like the US to stage a faster and sharper rebound from the worst financial crisis since the 1930s according to the Ernst & Young ITEM Club, reports The Telegraph.

“The UK has crawled out of recession but the government’s mid-term report card should read ‘could do better’,” said Peter Spencer, chief economic advisor to ITEM.

“Innovative policies from the Federal Reserve have helped to put the US economy in a stronger position to withstand tax increases and spending cuts. A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth.”

ITEM said infrastructure spending and measures to boost the housing market would improve Britain’s “disappointing” growth prospects.

It said the economy probably failed to grow in 2012 and forecast growth of just 0.9pc for 2013. The Office for National Statistics will give the first official verdict on how the economy fared in the final three months of 2012 on Friday, and it is likely to be an uncomfortable moment for the Chancellor.

City economists are predicting the economy shrank by 0.1pc in the fourth quarter, pulled down by industrial production in particular. A fall in gross domestic product would be in contrast with a 0.9pc rise in the third quarter, driven by the Olympics.

It would also raise the prospect of an unprecedented descent into triple-dip recession in Britain, which would be confirmed should growth in both the fourth quarter of 2012 and the first quarter of this year be negative.

A £5bn package of infrastructure spending announced in the Autumn Statement in early December did not go far enough and would have “negligible” impact on growth, and there was scope for borrowing to fund further investment, ITEM argues.

“The Chancellor has been far too timid,” it said. The group of economists also describe inflation targeting by the Bank of England as “long past its sell-by date” and said the arrival of a new Governor in Canadian Mark Carney in July would provide an opportunity for change.

ITEM was more upbeat about the consumer backdrop which it described as “one of the few bright spots” in its winter forecast.

“By the end of the year earnings are expected to be outpacing inflation for the first time since 2007, while nearly a quarter of a million people are likely to be added to the UK pay roll.”

The squeeze on household finances eased in January, according to a separate survey by Markit, and the public was the least pessimistic in four months about the outlook for the year ahead.

“The unfavourable economic backdrop and squeezed incomes are clearly making it difficult to keep household finances on an even keel,” said Tim Moore, senior economist at Markit.

“Overall, however, households are having to making hay while the sun isn’t shining, and January’s upturn from the lows of 2012 suggests that some gradual financial improvements are being made in spite of fragile conditions across the UK economy.”