LONDON (MNI) – The EU Commission has hiked its forecast for UK
economic growth in 2010 from 0.6% to 1.2% in its latest set of economic
forecasts for the EU-27.

The Commission forecasts UK growth in the UK will be 2.1% in 2011,
compared with a previous 1.9%.

But the Commission warns that the “outlook for private consumption,
the biggest GDP component, remains muted”.

It notes that some consumer expenditure has probably been brought
forward by households to avoid the re-increase of VAT to 17% in January
2010.

“While consumer sentiment has improved since the start of 2010 and
points towards continuing household spending growth in the short term,
the strength of the spending recovery will be limited by negative real
average earnings growth in 2010 and very limited job creation over the
forecast horizon”.

The Commission notes that although unemployment has risen by less
than had been feared during 2009, this has been accompanied by a “marked
fall in labour productivity” given the slump in output.

“This resulted in a considerable rise in unit wage costs, which is
likely to reduce the demand for additional labour. Furthermore,
households’ expectations of weak job prospects and the adverse impact of
future interest rate rises on debt servicing costs are likely to
encourage continued saving…”

The Commission also notes that the fall in sterling has yet to make
itself felt on the UK’s competitive position in export markets, raising
further doubts over policymakers’ capacity to rebalance the UK economy
away from domestic demand and towards exports and investment:

“Nonetheless, sterling’s depreciation has not yet been reflected in
more competitive terms of trade…”

Further out though, the Commission sees the fall in sterling should
produce a moderate improvement in external demand as pricing of exports
vis-a-vis those for imports starts to become more comopetitive for the
UK:

“The central scenario is for a moderate terms of trade
deterioration over the forecast horizon. This should help increase
export growth relative to that in imports enough to generate a moderate
improvement in net external demand, thereby supporting growth in the
medium term”.

The Commission expresses its confidence that the current
high level of inflation will start to ease once the impact of spare
capacity in the labour market is brought to bear, blaming the
rise in inflation this year to the fall in sterling:

“A significant part of the rise in inflation seems due to an
unexpectedly long-lagged effect of sterling’s depreciation since
mid-2007. Given a higher price level than previously expected, this
implies year-on-year inflation for much of 2010 will be higher as well,
even on a broadly unchanged view of monthly price movements. The
temporary effects should soon give way to deflationary pressures from
significant spare capacity, particularly in the labour market. This is
likely to bear down on factor costs, particularly average earnings
growth…”

The Commission estimates UK inflation at 2.4% this year, falling
to 1.4% next year.

–London bureau: 004420 7862 7492; email: dthomas@marketnews.com

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