The core economic data released in recent months has been much weaker than generally expected with the exception of the employment data.
Once the euphoria surrounding the strong third quarter GDP figures died away the cold reality of a lacklustre economic recovery has hit home.
Even the Bank of England is now saying the road to recovery will be long and winding with sluggish economic growth and inflation above target.
Our own forecasts have shown a weak performance for the UK economy for some time but there has always been that confidence that the dials were pointing in the right direction for the medium term.
The continued upheavals in Europe and the related impact on our export markets combined with a lack of confidence within the corporate sector look set to confine the UK economy to the slow lane for much longer than anticipated.
Current rates of lending to the non-financial corporate sector and SME are far from supportive of long term growth but household sector lending remains the strongest performer overall, see below.
(GRAPH 1 to go in here)
Our latest central economic forecasts are shown in summary form below. GDP output is expected to fall by 0.1 per cent this year before growing by around 1 per cent in 2013.
The economy is not expected to return to 2008 peak until 2015/16 at the earliest. Modest trend growth and a very subdued consumer are likely to be a long term feature of the UK economy, deleveraging and rebalancing the economy come at a heavy price.
Real household incomes have been squeezed by over 2.5 per cent in recent years as inflation has eroded the value of disposable incomes.
Lower inflation in the next 12 months should help to boost real incomes but only by around 0.9 per cent in 2013.
In the medium term real income growth should return to around 2 per cent which is consistent with 4 per cent nominal wage growth.
Bank rate is likely to remain at 0.5 per cent until 2015 unless we see a sharp improvement in the economy which looks unlikely at present. We have assumed mortgage spreads versus Libor continue to widen as banks attempt to maintain margins in a very weak lending market.
However, these spreads are unlikely to prove sustainable in the long term once Bank base rate finally starts to rise and latent retails savers start to look for better returns.
(GRAPH 2 to go in here)
We continue to expect house prices to fall by around 1 per cent next year before stabilising in 2014.
Low transaction volumes, limited mortgage availability, weak real income growth and low consumer confidence all have their part to play.
As the economy begins to firm during the course of 2013 and unemployment is seen to have peaked we are likely to experience a gradual return to very modest house price growth.
Mortgage lending is likely to remain broadly flat for the next two years as lenders concentrate on re-shaping balance sheets, building capital buffers and restoring margins further.
We expect gross mortgage lending to get back to £152bn by 2016, still less than half of the 2007 peak level.