Report predicts two years of doom and gloom

21 July 2008

A new economic report has painted a gloomy picture of the future, with the credit crunch and resulting recession likely to grip the nation for the next two years.

The respected Ernst & Young ITEM Club summer forecast has warned that the UK will struggle to avoid a recession in 2009, with predicted gross domestic product (GDP) growth of just 1% and inflation staying beyond 3% for the next 12 months. It also warns that there will be a “substantial” increase in unemployment.

The impact of this will be households across the country tightening their belts and changing their spending and borrowing habits.

Peter Spencer, chief economist to the Ernst & Young ITEM Club, says households will be lucky to see a 1% increase in their disposable income, prompting consumer spending on the high street to grow by just 0.2% next year.

“Rising inflation, the limited availability of credit and sharp reversals in the housing and equity markets mean that consumers are coming under increasing pressure," he adds. “Both on the high street and in the housing market it is going to get a great deal worse before it gets better. Our worry is that without [interest rate cuts] the consumer will follow suit, moving from their current state of denial into a state of despair."

House prices will also continue to fall, according to the report, as restricted mortgage lending brings home buying and selling to a standstill.

Spencer predicts prices to have dropped by around 10% by the end of 2008, with further falls of 6% expected next year.

And he warns these figures are averages, with “far greater” falls outside of London.

Consumer confidence

The worsening economic climate has fed through to consumer confidence, as rising costs and reduced borrowing opportunities give many people cause for concern.

Research by found that 49% of UK consumers are concerned about their financial situation for the next year, while 60% say reducing their outgoings is their number one financial priority.

Younger people feel most at risk from the economic downturn, with nearly 65% of people aged 16 to 24 concerned about their financial situation compared to 39% of the over-55s.

Hayley Parsons, chief executive of, says: "This research shows just how worried UK consumers are about rising prices and their personal finances.”

A recent Moneywise poll on how confident users were about the outlook for the personal finances, revealed a mixed bag of attitudes about the future. In the poll, 36% of people said they were quietly confident and 24% said they were neutral. However, 22% admitted they are not confident and 7% said they were pessimistic about the future.

Despite better confidence among older consumers, other research suggests that the credit crunch has not yet prompted pensioners to budget sufficiently.

The fear is many people are overspending in their first year of retirement, splashing out £8,000 more than in subsequent years.

Gary Shaughnessy, managing director of pensions at Prudential, which carried out the research, says: "One of the key concerns is that people don't have any idea how long they will live in retirement, and therefore don't think about the longer term implications of over-spending when they first retire."

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