Influential think-tank the Ernst & Young ITEM Club believes the UK economy may already have fallen back into recession.
They believe that the size of the UK economy contracted in the final quarter of 2011 and will contract further in the current quarter.
Looking at the year ahead, they believe that the UK economy should grow by 0.2% in 2012, assuming the problems in the eurozone are resolved.
Two consecutive quarters of economic contraction fits with the technical definition of a recession.
As the ITEM Club uses the same economic model as HM Treasury and the Office for Budget Responsibility, these forecasts should be treated seriously.
Whilst appearing to be in a technical recession, it is likely that the UK economy is falling only very slightly in size before remaining reasonably level through 2012 and recovering in the future. The ITEM Club expects the UK economy to return to ‘normal’ levels of growth in 2014.
They forecast growth of 1.75% in 2013 and 2.8% in 2014.
What does all of this mean for the investor?
The performance of the UK stock market and the performance of the UK economy are not always closely correlated. Whilst there are undoubtedly economic challenges for the UK in the year ahead, these do not need to be reflected in the performance of investment portfolios.
UK stocks in particular generate a lot of their revenues from overseas activities, so the state of the global economy has a bigger impact on returns than that of the UK economy.
We will need to wait until next week to see the official Office for National Statistics economic growth figures when they are published. Ahead of that, we do not think the ITEM Club is too wide of the mark.
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