UK economy has stalled

The latest forecast from an influential economist at Ernst and Young suggests that UK economic growth may have stalled.

The latest Ernst and Young Item Club forecast, which uses the same forecasting methods as those used by government, has downgraded its economic growth forecasts for the year.

It now forecasts economic growth of 0.9% in 2011, down from an earlier prediction of 1.4%.

For 2012, the Item Club growth forecast has been cut from 2.2% to 1.5%.

At the same time as publishing these lower forecasts, Ernst and Young released some interesting commentary on what it will take to create better economic recovery.

It concluded that the additional quantitative easing being undertaken by the Bank of England through their asset purchase programme is unlikely to prompt recovery. They also believe that new growth measures will be needed to get the British economy back on the right track.

They recommend that the government use targeted monetary and fiscal measures to stimulate growth, including an interest rate cut to 0.25% and a cut in the rate of stamp duty for first time buyers.

Despite this glum economic forecast, the FTSE 100 index of leading UK company shares has performed admirably this morning, breaking through the psychologically important 5,500 level in early trading. This is a good reminder that economic and market performance are not always closely correlated, particularly in the short term.

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