The UK has narrowly avoided a double-dip recession but will struggle for the rest of the year unless businesses stop hoarding cash and start investing, the forecaster warns today.
It expects growth to rise to 1.5% in 2013 and 2.6% in 2014.
Emergency measures by the Bank of England, European Central Bank and US Federal Reserve including the Bank of England have boosted confidence andstabilised financial markets, pulling the UK back from the brink of recession, it said.
The economy shrank by 0.3% in the final three months of last year and is expected to avoid a technical recession by eking out around 0.1% to 0.2% in the first quarter of 2012. Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said the UK will not prosper again until businesses invest stockpiled cash.
He said: "Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy."
The cash balances of private non-financial companies are worth more than £754bn, the forecasting group said, 50% of GDP, but business investment last year only increased by 1.2%.
In contrast to big business, households remain under intense pressure, with private sector companies finding it increasingly difficult to create the jobs to offset losses in the public sector.
Unemployment is expected to approach 9.3% of the UK's total workforce by the middle of next year, with nearly three million people out of work.
Spencer said: "Households remain under the cosh and UK unemployment is set to go even higher by the end of the year.
"But there is a small glimmer of light at the end of the dole queue. For the first time in years, the gap between wage growth and inflation should start to close, before reversing in 2013."
The group forecasts that disposable income will fall by 0.2% in 2012, while consumer spending will increase by 0.8% before accelerating to 1.1% in 2013 as household incomes gradually strengthen.
Elsewhere, the group predicted that the UK's export performance should pick up despite shipments to the eurozone being restrained.
Exports of goods increased by 5.1% in volume terms in 2011, while services were up by 3.9%. The UK is expected to put in a similar performance this year, with exports growing by 4.5% and net exports adding 0.3% to GDP.
"The UK has so far avoided the dreaded double dip, but a lot still hangs in the balance. After three business-friendly budgets and more tax cuts in the pipeline, it is now up to corporates to play their part in the UK's recovery," Spencer said.