Stuttering economy ‘risks recession’

By Alex Stevenson

Increasing unemployment and a stalled economy recovery are among the gloomy findings of Ernst and Young's latest forecast.

Its Item Club said the eurozone crisis was the biggest risk to growth in the UK, which it said would only be 0.9% this year. Three months ago it had estimated GDP growth would reach 1.5%.

A return to recession remains possible even if the European Union manages to avoid further setbacks in the eurozone, it warned.

The figures are based on the same model for the economy as that used by the Treasury. Report author Peter Spencer said they had been based "on the assumption of an early resolution" to the eurozone crisis, "which may prove optimistic in view of the very slow progress made until now".

"It's worse than we thought," he told the BBC.

"The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases."

Chancellor George Osborne is refusing to come up with a 'plan B' as Britain's recovery continues to struggle to return to growth, insisting that the coalition's package of austerity measures must be pushed through regardless.

Mr Spencer said there was scope for targeted tax relief, a cut in national insurance contributions for people under 21 and a cut in stamp duty to help stimulate activity in the construction sector.

But he added that businesses needed to have contingency plans prepared to cope with the current instability.

The Item Club predicted growth would improve to 1.5% in 2012 but predicted unemployment, which currently stands at 2.57 million, would increase further.

Treasury officials hope the Bank of England's resumption of quantitative easing will help stimulate growth. But today's report warned that the recovery was unlikely to be aided.