U.K. GDP Will Grow Twice as Much as Forecast, Item Club Says

By Brian Swint

Oct. 19 (Bloomberg) -- The U.K. economy will grow twice as fast as previously forecast next year as the country pulls out of the worst recession in a generation, Ernst & Young LLP’s Item Club said.

Gross domestic product will increase 1 percent in 2010, compared with a 0.5 percent forecast in July, the researchers, who use the same model as the U.K. Treasury, said in a statement in London today. The estimate for 2009 was lowered to a 4.5 percent contraction from a 4.4 percent drop.

The Bank of England will assess the progress of its 175 billion-pound ($286 billion) program to buy bonds with newly created money as the interest rate-setting panel produces economic forecasts in November. Britain probably escaped recession in the third quarter after five quarters of contraction, a Bloomberg News survey shows.

“The outlook for the next 12 months is certainly looking more positive than the last year but it is going to be a bumpy ride,” said Peter Spencer, chief economist at the Item Club and a former U.K. Treasury official. “There could still be substantial pain.”

Gross domestic product rose 0.2 percent in the July- September period, the first increase in six quarters, according to the median of 33 forecasts in a Bloomberg News survey. From a year earlier, output dropped 4.6 percent, the survey showed. The Office for National Statistics will release the data on Oct. 23.

The central bank’s program to kick start the economy, so- called quantitative easing, has been “disappointing,” Spencer said. Deputy Governor Charles Bean said Oct. 13 that the bond purchases had bolstered asset prices and confidence.

‘Disappointing’ Results

“The revival in capital markets has been helped by the cash infusions from QE, but apart from that the results have been disappointing,” Spencer said. “The QE cash and low interest payments are being seen as an opportunity to pay down debt rather than spend, hindering economic recovery.”

Prime Minister Gordon Brown, trailing in opinion polls with an election due by June, said Oct. 12 that it’s too early to withdraw economic stimulus. His government has pledged to halve the budget deficit within four years. The spending gap will touch 12 percent of GDP this year, the Treasury forecasts.

A reduction in value-added tax and a partial holiday on stamp duty, a tax levied on home purchases, are set to expire next year. The government has planned to increase Britons’ social security contributions.

“Policy will begin to tighten in early-2010,” Spencer said. “But these measures only provide a fraction of the extra income needed to close the government deficit. Whoever forms the next government faces a once in a generation challenge.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.