Big firms fiddle while Britons burn with debt

The economy is not going back into recession, but growth will be low because large firms are not spending their huge cash reserves, a new report has concluded.

An Ernst and Young Item Club report has said the UK economy will only see 0.4 per cent growth over the course of 2012 and notes that: "In the UK, companies have been swimming in cash while consumers have been drowning in debt."

It noted this trend differs from the pattern in some other countries, such as in the US. But the key point is that while Britons have been living beyond their means and borrowing too much, large firms have been able to maintain their profits, yet are not investing their cash through an apparent lack of confidence, which is in turn is increasing the overall gloom.

This apparent catch-22 situation in which companies will not spend until the economy improves but the outlook stays bleak until they start investing – could lead to a protracted period of struggle for consumers.

One reason for this is that while people are looking to pay off their debts, they are not enjoying any improvements that could help them in this task, such as rising wages.

By contrast, they have been hit with rising prices that have boosted the coffers of major firms, such as energy companies, contributing to a squeeze on disposable incomes that makes it harder to pay off money owed.

For some, this could mean deep difficulty in maintaining repayments and a debt management plan.

One expert predicting a long haul for the UK is Philip Coggan, Buttonwood columnist and Capital Markets editor at The Economist.

He said last week: "It is going to take five to ten years to sort out this mess and in that period, different countries will follow different routes to get rid of their debt."

By James Francis