Britain's double-dip recession 'over and recovery on the way'

Britain's double-dip recession is over and the recovery is gathering steam, the Ernst & Young ITEM Club, one of the UK's leading forecasters, has said.

According to the ITEM Club, the economy will return to growth over the final six months of the year, boosted by falling inflation and a pick-up in consumer spending.

From there, "the recovery could be quicker than expected" as confidence will recover sharply if eurozone leaders deliver on their promises for a banking union and growth pact.

ITEM's upbeat outlook came despite its decision to downgrade its growth forecasts for 2012 as whole from 0.4pc to 0pc, due to the "dismal first half of the year".

The International Monetary Fund is also expected to slash its UK forecast for 2012 today, as part of its global update. The IMF will downgrade the UK from the 0.8pc growth predicted in April to something closer to the current consensus of 0.3pc.

Britain has officially been in recession for the six months between October and March , shrinking by 0.7pc over the period, and the double-dip is widely expected to have lasted until June.

However, the economy should stage a recovery in the second half of the year as inflation falls sharply and household incomes pick up, boosting consumer spending and delivering an "Indian summer" on the high street, ITEM said.

Peter Spencer, ITEM's chief economic adviser, said: "Spiralling inflation has cut real wages by 7.5pc over the last four years, but the squeeze is almost over. Inflation is now coming back to heel."

He expects household disposable incomes to rise by 1.5pc in the final three months of year compared with the same period in 2011 and by 2.5pc in the first quarter of 2013. The recovery in family finances will underpin growth of 1.6pc in 2013, accounting for two-thirds of the total increase in output, Mr Spencer said.

Official figures on Tuesday are expected to show that inflation is on the way down, falling to 2.7pc in June from 2.8pc in May. As recently as September last year, inflation was 5.2pc. ITEM expects inflation to fall to 1.7pc in the final quarter of the year.

Although Mr Spencer expects consumers to drive the recovery next year, he said that over the longer term they will be "more focussed on reducing their debt burden rather than splashing the cash".

Beyond 2013, growth will bounce back to 2.6pc as British manufacturers finally deliver the export-led recovery and businesses recover the confidence to invest some of their £750bn of cash.

However, he added that the good economic news could come sooner than predicted. "There have been encouraging signs from the eurozone and the UK. They are finally making an attempt to save the economy rather than just prop up the system," he said.

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