With inflation outstripping wages and a raft of benefit cuts to due in 2013, household incomes are likely to shrink, analysts warn
The Bank of England will resist calls this week to pump extra funds into the economy despite concerns that a recent decline in manufacturing production and the weak construction sector could force the UK into a triple dip-recession. Policymakers at the central bank will debate how to generate growth after more than three years of falling living standards.
With inflation consistently outstripping wages and a raft of cuts to benefits due in 2013, household incomes are likely to worsen, according to economists.
The bank's monetary policy committee (MPC) is likely to keep its powder dry after the economy briefly sprang back to life in the third quarter when gross domestic product (GDP) grew 1%.
A fall in unemployment in autumn and a modest rise in consumer spending have also offset worse-than-forecast manufacturing output, which has shrunk as the government's austerity policies and the euro crisis hit demand for UK goods.
While some MPC members could vote to boost quantitative easing (QE) by £50bn to £425bn, most economists expect a committee majority to keep interest rates at a record low of 0.5% and QE at £375bn.
Both the BoE Governor and deputy governor, Sir Mervyn King and Paul Tucker, have suggested in recent speeches that the impact of QE is reaching its limit.
Howard Archer, chief UK economist at IHS Global Insight, said: "While it still looks to be a close call, we believe the 1% quarter-on-quarter spike in GDP in the third quarter makes it more likely than not that the Bank of England will hold off from more QE."
Members of the MPC have come under intense pressure to cut the cost of lending and boost credit in the economy as the Treasury maintains its determination to limit government to pay down debts.
The MPC has waited to complete its last £50bn of government bond purchases and a new direct-funding scheme for banks (funding for lending), before pushing ahead with another £50bn of QE.
Economic analysts, the CEBR, said the economy will remain weak in 2013 and 2014, though it will outstrip the eurozone as it copes with the double whammy of sharply declining incomes and rising debts in several key countries. The CEBR said the UK would grow by 0.8% next year and 1.4% in 2014 against a eurozone average of -0.4% in 2013 and 0.4% in 2014.
"Even assuming the problems of the euro do not cause an economic meltdown before the German elections next year, we are looking at a very weak economic outlook in Europe for the next two years" said Tim Ohlenburg, senior economist at CEBR and main author of the report.
However, the UK could fall back into an unprecedented third recession in four years if the 1% rise in the third quarter proves to be an Olympics-induced blip.
The latest ICAEW/Grant Thornton UK business confidence monitor found smaller UK firms had scaled back plans for expansion in 2013.
The report noted that a mood of caution suggests while some sectors and regions start to improve, "economic recovery will be restrained in the next 12 months".
Michael Izza, chief executive of the accountancy body, the ICAEW, said: "While the UK economy has come out of recession, business confidence is still very fragile. Against a backdrop of a softening global economy, the recovery is yet to take hold. More needs to be done to secure the UK's long-term economic outlook by encouraging businesses to invest and to stimulate growth."
A survey of small businesses found that almost half were reluctant to invest in new jobs while confidence in the economy's ability to recover remained weak. The eurozone will slow the UK's recovery next year as the 17-member currency zone deals with a huge overhang of debts in Greece, Ireland, Portugal, Spain and Italy.
Greece is due to vote on €13.5bn of spending cuts and tax rises on Wednesday ahead of a budget vote next Sunday.
Prime minister Antonis Samaras is confident he can win the vote to secure more than €37bn (£30bn) of loans from the EU and International Monetary Fund.
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