UK: Economy reeling under triple blow

The economy will be hit by a treble dose of bad news this week with soaring prices, stalled high street sales and predictions that economic growth will flatline for at least another year.

City economists say inflation could hit 5 per cent when figures are published tomorrow, putting further pressure on the incomes of cash-squeezed families, savers and pensioners. Two hard-hitting reports today warn that the dire economic climate will be little better in 2012, heightening the risk of a double-dip recession.

Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, said: ‘It’s worse than we thought. ‘The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.

'With the UK recovery grinding to a halt, new measures now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track.’

The news that inflation is set to rise from the current level of 4.5 per cent will dash consumer confidence and hit growth further. The increase is being driven by increasing fuel bills and soaring global commodity prices.

Howard Archer, economist at research firm IHS Global Insight, said: ‘It is hard to be optimistic over the prospects for consumer spending in the near term at least.

Average earnings are going up by only around 2 per cent, so the average family is seeing a fall in their living standards and are struggling to make ends meet. With the returns on many savings accounts as low as 0.5 per cent, savers are making negative real returns on their investments and pensioners are also being hard-hit.

A rise in inflation to 5 per cent will also land the Government with an additional £5billion benefits bill, as welfare payouts are hiked to take account of rising prices. September’s inflation figure is the one used to increase State benefits in a rise that takes effect in April.

Rachel Reeves, the shadow chief secretary to the Treasury, said: ‘Almost everyone but the Prime Minister and Chancellor can now see that this government’s austerity plan has failed to deliver the jobs and growth we were promised.’

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