The Government and the Bank of England need to develop a more innovative approach to fiscal and monetary policy, according to Ernst & Young ITEM Club.
In its Winter Forecast, the consultancy predicts that the UK economy will expand by just 0.9% over the course of 2013 and said the country can expect “sluggish growth” for the coming years unless a fresh approach to macroeconomic policy is found.
Ernst & Young ITEM Club chief economic adviser Peter Spencer says: “The UK has crawled out of recession but the Government’s mid-term report card should read ‘could do better’.
“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.”
One area that the report highlights is infrastructure. The ITEM Club claims the package of infrastructure spending announced in the UK Autumn Statement had the potential to be “a real game changer” – but there should have been more than £5 billion committed to the scheme.
In the short term, the ITEM Club expects consumer spending to drive UK growth. Consumer spending is forecast to increase by 1.1 per cent in 2013 and by 2 per cent in the following year.
“The consumer revival is well under way and is one of the few bright spots in our forecast,” Spencer says.
“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. But this is by no means a long-term solution to UK growth.”
Spencer adds that “the clouds of uncertainty” hanging over the UK economy are starting to clear – but this only reveals “a low-growth landscape” populated by confidence-lacking consumers and business and the need for greater initiative on the part of policymakers.
“Plan A is still working but, for a real step change in the UK’s growth prospects, we will need to see a more imaginative approach to monetary and fiscal policy this year,” he concludes.