Here comes some economic growth

The latest report from the influential Ernst & Young ITEM Club suggests that the UK economy will return to growth in the second half of 2012.

Using the same economic model as the Treasury, the ITEM Club believes that this return to growth in the second half will still result in an overall contraction of 0.2% in 2012 as a whole.

Whilst there have been positive effects of lower inflation and rising employment, trade performance in the UK has been disappointing.

Looking further ahead, the ITEM Club is forecasting growth of 1.2% in 2013 and 2.4% in both 2014 and 2015. This is likely to be fuelled by higher consumer spending as price inflation continues to fall and the jobs market improves.

They are also predicting a recovery in the mortgage market leading to improvements in the property market from next spring.

It’s not an entirely rosy picture.

The ITEM Club are also warning that this return to more balanced economic growth in the UK is threatened by international events, such as the state of the economy in the US.

We are keeping a close eye on developments across the Atlantic as they approach a ‘fiscal cliff’ unless a political deal is reached by the end of the year on spending cuts and tax rises.

Investors should keep in mind that, whilst economic growth is typically good news for markets, the economy and investment markets are not always closely correlated. Equity market growth can occur separately from economic recovery, as the prospects for companies often lead economic recovery.

Photo credit: Flickr/Jong Soo(Peter) Lee