PROBLEMS within the eurozone may not be the main cause of weakness in the UK economy, business leaders from across the East of England heard at a major regional CBI event.

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But while there were some positive signs for the coming months and years, a collapse of the eurozone would have a devastating effect on Britain, the audience at the CBI’s East of England Midsummer Dinner at Downing College in Cambridge was told.

Richard Woolhouse, head of tax and fiscal policy at the CBI, said: “The enormous challenges of the eurozone may not have been the main cause of weakness to the UK plc to date, but how the crisis unfolds will be major to the outlook into 2013.”

Mr Woolhouse, a former economic adviser to HM Revenue & Customs, continued: “There is no doubt a disorderly collapse of the eurozone would have a devastating impact on the UK economy.

“If there is a scenario where we see the exit of peripheral countries such as Greece, this could lead to contagion across the Eurozone which engulfs the larger nations.

“In this context the impacts on both direct trade and more importantly financial markets and banking disruption would be very significant.”

Although it was tempting to blame the eurozone for all the ills of the UK economy, the fundamental reason for weakness over the past couple of years had been reduced consumer spending, Mr Woolhouse added.

“It is interesting to see that household consumption is 5% below the pre-recession level,” he said. “At the same stage of the 1990 recession, recovery was 5% above which starts to reveal the real reason behind the weakness of the recovery over the past two years. We have to accept that real disposable income has been flat since the recession began.”

However, he added: “The good news though is that inflation is now coming down. The latest numbers show inflation falling 2.8% faster than expected. This will continue falling back easing the squeeze on incomes. That it in itself is cause for hope about the economy into 2013, as consumer spending should respond.”

Speaking at the same event, attended by more than 100 business leaders from across the region, Richard Tunnicliffe, director for the CBI in the East of England, commented how the region continued to be well set to come through the downturn.

“There is no doubt, as Richard Woolhouse has explained, that business remains in a challenging environment and the next twelve months are an important part of the recovery,” he said.

“We also know that here in our region we are home to some of the most entrepreneurial and hardworking businesses in the UK. Business is the key pillar to leading the UK out of recession and we heard from many business leaders that joined us last night there is a real sense of optimism for the future.”

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