UK economy to 'return to growth' in second half of year

The UK's economy will rebound in the second half of the year, the Ernst and Young Item Club's latest report says.

However, its quarterly forecast, which is produced using the same model as the UK Treasury, still predicts that the economy will contract by 0.2% over the year as a whole.

The Item Club report says that the country's trade performance has been deeply disappointing.

This has offset the positive effects of lower inflation and rising employment.

The forecast is more optimistic than the International Monetary Fund's assessment released last week, which predicted that the UK economy would shrink by 0.4% this year.

The Item Club says economic growth will be 1.2% next year and 2.4% in 2014 and 2015, fuelled by higher consumer spending as a result of falling inflation and a better jobs market.

It says these improvements will be boosted by a recovery in the mortgage and housing markets next spring.

On Monday, the latest figures from the Office for National Statistics backed up the picture of rising incomes.

It showed that average UK household income was £4,510 per household after tax in the April to June quarter, up £69 from the previous three months and the highest level for 18 months.

However, Peter Spencer, Item Club's chief economic adviser, warned economic improvements were not guaranteed.

"Lending has started to loosen up and we're hopeful that the housing market is primed for a recovery early next year," he said.

"There are though plenty of 'ifs' and 'buts'. The big question is the extent to which consumers will choose to grasp the opportunity or continue to de-leverage and to pay down their debts."

The report also warned that a move back to balanced growth over the medium term was highly dependent on economic developments outside the UK, including in the US where taxes are set to rise and government spending cut - the so-called "fiscal cliff" - unless a political deal is struck soon.

The Item Club reports says: "Even if the US negotiates the fiscal cliff and euro policymakers do what it takes to save the single currency, these markets will be held back by fiscal retrenchment.

"Prospects for the rapid growth markets are less bright than they seemed last year."