Short-term economic prospects

1.16  The impact of the euro area crisis on confidence and export prospects is making the recovery more difficult still. The latest phase of the debt crisis continues to play out around the world because fundamental problems of excessive levels of debt have yet to be comprehensively addressed.

1.17  Credit conditions have tightened due to strains in bank funding markets. Confidence indicators and business surveys have weakened due to the instability and uncertainty caused by the crisis. That uncertainty has fed through to household spending and to companies' investment and hiring decisions, causing GDP and private sector employment growth to slow. Unemployment has risen in recent months, with labour market conditions particularly challenging for young people.

1.18  As a result, growth forecasts for 2012 have been revised down significantly around the world. The OBR has revised down its forecast for world growth in 2012 from 4.3 per cent to 3.5 per cent and for euro area growth from 1.8 per cent to 0.5 per cent. The OECD, European Commission and IMF forecasts for growth in 2012 have all been revised down in recent months.

1.19  In the UK, global uncertainty and instability are also affecting confidence and slowing growth. The cost and availability of credit has deteriorated, particularly for smaller businesses that are most reliant on bank finance. In export markets, conditions are even more challenging, given Europe remains the UK's major trading partner, accounting for around half of all UK exports.