From the Ernst & Young ITEM Club -
"An economy that is Va-va-voom as full employment beckons.
Disappointing tax take and worsening public finances may mean problems post election
London 19 July 2004: The latest ITEM Club forecast predicts a UK economy that is in great shape for 2004 and beyond, with GDP growth expected this year of 3.5% and 3% in 2005.
The world economy has just had its best quarter since 1988 driven by the US and China who are even dragging Japan and the Eurozone in their wake. This has proved particularly good news for UK exporters.
Professor Peter Spencer, chief economic adviser to the ITEM Club, explains, "With a global economy firing on all four cylinders and a UK economy in its best shape since the late 1990s, we can look forward to robust growth over the next two years. Even if you regard the full employment measure as largely symbolic, the fact that the Government will be able later this year to announce that it has been achieved is a ringing endorsement for their management of the economy."
Strength across the board The strength of UK plc is now visible right across the board in the high street as well as the office and factory floor. Despite the recent upswing in interest rates the housing market continues to defy some economic pundits who have been predicting an apocalyptic downturn. The ITEM Club forecast shows that as interest rates peak next summer at 5.5% the house prices will flatten out.
Companies are hiring again across all industry sectors including manufacturing and recent business surveys have demonstrated near record levels of optimism from boardrooms. Indeed as ITEM has commented recently we believe that the official statistics are actually underplaying the strength of the economy.
The day after the election So why despite all these positive indicators is ITEM concerned about the prospects for an incoming Chancellor post election? As the ITEM Club first highlighted last autumn, the combination of the continually high levels of public expenditure and unrealistic assumptions by The Treasury about the amount of tax that it can collect means that there will be very little room for manoeuvre on fiscal policy for any incumbent (new or current).
Spencer explains, "We still believe that the Chancellor will have to be careful about breaching the Golden Rule this side of an election and indeed is very likely to do so afterwards, with the loss of credibility that this would entail.
"Although the overall strength of the economy means that any potential shocks to the system can probably be dealt with reasonably comfortably, the scale of the public deficit is an unwelcome inheritance for any of his potential successors."
Clouds on the horizon? Although many of the indicators are so positive, total household debt in the UK is approaching the £1trillion mark, 80% of which is directly linked via mortgage payments to future rises in interest rates. The ITEM Club believes that without a drastic increase in mortgage rates and without a jump in unemployment, which would then lead to a large number of forced sellers, a crash in the housing market remains a distant possibility.
Spencer again, "With a prosperous economy and relative low interest rates and unemployment, a dramatic post-election correction in house prices is unlikely. However, the next few years will only see a modest increase in property values and individuals banking on house price inflation to pay for their retirement will suffer the same disappointment as those who relied on the equity market bubble of the late 1990s."
The other concern at the moment in the global economy is the price of oil. As oil prices remain stubbornly around the $40 a barrel mark ITEM does see risks to world trade and exports, particularly to the US. As Spencer explains, "Even though the UK is less dependent on imported oil, if the $40 a barrel level is maintained it could take 0.5% off GDP next year."
~ENDS~
Editors' notes
The ITEM Club is the only economic forecasting group to use the HM Treasury?s model of the UK economy. Its forecasts are independent of any political, economic or business bias and this independence is underpinned by the untied sponsorship of Ernst & Young LLP. ITEM stands for Independent Treasury Economic Model.
HM Treasury uses the UK Treasury model for its UK policy analysis and Industry Act forecasts for the Budget. ITEM?s use of the model enables it to explore the implications and unpublished assumptions behind Government forecasts and policy measures. Uniquely, ITEM can test whether Government claims are consistent and can assess which forecasts are credible and which are not.
The ITEM Club was founded by a group of companies who wanted to obtain economic forecasts focused on business. The Club's corporate members are all major UK or global organisations (Ernst & Young is not a member but is the sole sponsor). Members span a range of industry sectors, and have the opportunity to discuss each forecast before it is finalised so that it can take account of their current business experience. This ensures that ITEM?s forecasts and analyses are particularly relevant for business and are not just academic or theoretical."