UK growth forecast hit by Eurozone ‘uncertainty’

By Phil Scullion 

Ernst & Young has lowered its UK growth forecast for the second time this year due to growing "uncertainty" over the Eurozone crisis.

The accountancy firm's Item Club survey initially predicted a GDP rise of 1.8% but has now revised that figure to 1.4%.

Peter Spencer, chief economic advisor to the Item Club, said the UK was now at a "critical juncture".

He warned: "The risks to the world economy and the Eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy."

Despite a predicted rise in business investment of eight per cent this year and 12% in 2012, Mr Spencer said that the uncertainty over the Eurozone would continue to act as a "damper" on UK business investment.

However there is some light at the end of the tunnel, with corporate balance sheets "healthy" and an expectation that exports should quickly pick up once the difficulties in the Eurozone are resolved.

Item say that UK inflation figures of 4.2% are affecting consumer spending power and economic growth.

"The situation remains pretty dismal for most consumers who, according to official statistics, have been plunged back into recession.

"Item sees real household disposable incomes falling by 1.4% this year, following a decline of 0.8% in 2010 – the first back-to-back declines in household income since 1976," Mr Spencer added.

The news the the UK economic recovery is struggling to gain momentum comes as a further blow to chancellor George Osborne and his austerity package.