ECONOMIC growth will return in 2010 – but will be sluggish and face many obstacles through the year, an economist has warned.
With the economy likely to have grown in the final quarter of 2009, further expansion is expected through this year.
However, that growth, according to Howard Archer, chief economist at IHS Global Insight, could stutter, with VAT returning to its rate of 17.5% and the car scrappage scheme ending in February.
Dr Archer said GDP would stand at 0.9% in 2010, with consumer price inflation (CPI) averaging 2.2% over the 12 months and returning to below 2% by the end of the year.
He predicted that unemployment across the UK will reach a peak of 2.75 million towards the end of the year and a “modest relapse” in house prices.
“Despite the probable return to growth in the fourth quarter of 2009, serious economic and financial obstacles to sustainable, healthy growth remain, and we suspect that recovery will be gradual and prone to losses of momentum,” said Dr Archer, pointing to the end of the scrappage scheme and the VAT rise.
He went on: “High and still rising unemployment – despite a surprise fall in claimant count unemployment in November – an ongoing need for consumers and businesses to improve their balance sheets and persistent tight credit conditions amid still serious financial sector problems are particularly worrisome for growth prospects.
“Furthermore, businesses are likely to remain cautious in their capital expenditure due to substantial excess capacity and still serious concerns and uncertainties over the outlook.
“Meanwhile, sustained global economic recovery is by no means certain and any relapse would undermine hopes that exports can make an increasing contribution to UK growth.”
Dr Archer said the fiscal tightening that will need to take place thanks to the state of the public finances will also impact the pace of growth.
He said: “This is more likely to really start biting in 2011, but worries over the extent of the fiscal tightening needed may well weigh down on consumer and business confidence and behaviour in 2010.
“Indeed, consumer confidence suffered a significant relapse in December, which clearly reflected an unfavourable view of the pre-Budget report.”
The prospect of another tough year for business, despite projections for growth, has been backed up by the latest research from the British Chambers of Commerce.
The BCC found that two- thirds of businesses are planning wage freezes or pay cuts next year, while 18% were consider-ing the removal of benefits, such as bonuses and gym membership.
The BCC said the “persistent squeeze” on pay packets was an indication that companies did not see economic conditions dramatically improving in 2010, despite hopes that the end of the recession may have arrived in the final quarter of 2009.
More than two thirds of firms questioned said they would operate at the same or reduced level in the first few months of 2010, suggesting a “very fragile” recovery.
These factors are likely to influence inflation over the year, said Dr Archer, who predicted CPI falling back below the 2% mark after peaking thanks to rising petrol prices and the return to VAT at 17.5%.
He said: “There is still a good chance that inflation will moderate appreciably thereafter and be back under 2% later in 2010 as base effects become less unfavourable and underlying pressures are largely contained by substantial excess capacity, muted recovery, wage moderation amid high unemployment and an ongoing need for retailers to price competitively in the face of still limited consumer spending.”
