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UK economic update

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Notwithstanding the London Olympics and the Queen’s Diamond Jubilee, 2012 is widely expected to be a tough year for the UK economy. The Ernst & Young Item Club (E&YIC) warned that the UK might already be back in recession. Although the prospect of a “serious double-dip” is not considered likely, E&YIC believes the UK economy is unlikely to achieve positive growth before 2013, warning: “The longer the uncertainty continues, the more debilitating the impact... on the UK’s economic prospects.”

The Bank of England’s Monetary Policy Committee maintained UK interest rates at 0.5% for yet another month. The annualised rate of inflation eased from 4.8% in November to 4.2% in December, and the Consumer Prices Index experienced its most substantial annualised monthly drop since between November and December 2008. The rate of unemployment rose to 8.4% during the three months to November, reaching its highest level since 1995.

UK companies are in relatively good shape with strong balance sheets and sizeable cash reserves; however, low confidence is leading to cuts in spending and recruitment. E&YIC warned that, contrary to earlier hopes, job losses in the public sector are not being offset by the private sector. Looking ahead, E&YIC urged UK companies to ensure they plan for different scenarios: “No-one really knows how the eurozone crisis is going to play out. Doing nothing is simply not an option.”

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