UK 2011 growth forecast cut to 0.9 percent - ITEM Club

LONDON Mon Oct 17, 2011 7:31am BST

Demonstrators camp outside St Paul's Cathedral in central London October 16, 2011. Around 250 protesters set up camp outside St Paul's Cathedral in the heart of London on Sunday, promising to occupy the site indefinitely to show their anger at bankers and politicians over the global economic crisis. REUTERS/Olivia Harris

Demonstrators camp outside St Paul's Cathedral in central London October 16, 2011. Around 250 protesters set up camp outside St Paul's Cathedral in the heart of London on Sunday, promising to occupy the site indefinitely to show their anger at bankers and politicians over the global economic crisis.

Credit: Reuters/Olivia Harris

LONDON (Reuters) - Britain's economy has stalled and will grow less than expected this year, despite the Bank of England's latest injection of 75 billion pounds to try to stimulate a faltering recovery, forecasters said on Monday.

The Ernst & Young ITEM Club, which bases its quarterly report on finance ministry models, downgraded its 2011 GDP forecasts to 0.9 percent from the 1.4 percent it predicted three months ago.

Growth forecasts for 2012 were cut to 1.5 percent from 2.2 percent and unemployment will keep rising until it peaks at 2.7 million people in Spring 2013, the report said.

The central bank's second round of asset purchases is unlikely to kick start the economy in the face of worries about the euro zone debt crisis and uncertain global demand, according to the ITEM Club's autumn report.

"It's worse than we thought," said Peter Spencer, chief economic advisor to the ITEM Club, sponsored by accounting firm Ernst & Young. "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 euro zone increases."

'CRITICAL JUNCTURE'

Britain's economy has barely grown over the last year and the coalition government and BoE are under mounting pressure to take urgent steps to try to restore growth.

Inflation of nearly 5 percent is squeezing people's living standards as wages rise slowly and unemployment has started to increase again.

Britain's economy is at a "critical juncture" and the BoE's second round of quantitative easing is "unlikely to put the recovery back on track", ITEM said.

"The additional 75 billion pounds of asset purchases...is unlikely to be the silver bullet to the UK's economic woes," the ITEM Club said in a statement. "Long-term gilt rates are already at all-time lows and, given the current uncertainty in the market, asset prices may not respond."

Policymakers should consider cutting interest rates to a new record low of 0.25 percent, from 0.5 percent, despite inflation running at more than double the bank's 2 percent target, the forecasting group said.

It would be too risky for the Conservative-led government to revise an austerity drive aimed at all but eliminating a budget deficit that peaked at nearly 11 percent of GDP, the club said.

However, Chancellor George Osborne could reallocate existing budgets to support business, for example by cutting the National Insurance employee tax.

Cutting property purchase taxes, particularly for first-time buyers, would support the construction industry and could help consumer spending, ITEM's Spencer added.

Lower interest rates could save the government money on its debt repayments, freeing up money for the tax cuts, he said.

(Editing by Toby Chopra)

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