UK to grow less than previously forecast

Ernst & Young LLP’s Item Club will cut its UK economic growth forecasts for the second time this year as weak consumer spending and Europe’s sovereign-debt crisis cloud the outlook for the recovery.

Gross domestic product will increase 1.4 per cent in 2011, compared with an April projection of 1.8 per cent, the London- based Item Club, which uses the same forecasting model as the UK Treasury, will say in a report to be published in London tomorrow. It will rise 2.2 per cent in 2012, instead of 2.3 per cent. The Item Club also reduced its forecasts in April.

The UK recovery is failing to gain momentum as inflation, at more than double the Bank of England’s target, squeezes consumers’ incomes and the government cuts spending to reduce the budget deficit.

While there are imbalances in the pace of the global recovery, prospects for exports remain “encouraging,” the Item Club will say.

Pressure from inflation “is now so intense that spending and saving are both falling,” the report will say. “With the government cuts now being implemented, this leaves the economic recovery totally dependent upon exports and business spending.”

The Item Club will also say that Greece “still poses a major threat to the world financial system.” The International Monetary Fund called last week for officials to adopt a “greater sense of urgency” in resolving the country’s debt turmoil.