The latest from the Ernst & Young ITEM Club Winter forcast

The latest from the Ernst & Young ITEM Club Winter forcast -

A return to form in 2004 for the UK economy

But a cut in ECB interest rates is required to halt Euro bubble

London, 19 January 2004: The latest Ernst & Young ITEM Club forecast predicts a healthy economy for 2004 with growth of 3% tempered by a full percentage point rise in interest rates by the end of the year.

Professor Peter Spencer, chief economic adviser to the ITEM Club, explains, "With a stronger global economic picture, a private sector that is showing distinct signs of recovery and with demand holding up from the public sector, we now have a UK economy in a more robust state than for the last couple of years. It is possible that the Chancellor will meet the lower end of his growth forecasts for both 2003 and 2004."

But this does not mean the Government will receive the tax revenues that the Chancellor has forecast. As the ITEM Club warned at the time of the Pre Budget Report last month, without a significant increase in tax rates the anticipated revenue figures that the Treasury are predicting are no more than a pipe dream. The 'Golden Rule' will be breached early in the next Parliament.

Feeling good again? The ITEM Club is forecasting higher growth from manufacturing and service sectors in 2004, the latter particularly as activity in the financial markets picks up. Stronger economic growth will generate higher employment and higher corporate profitability. Not only will there be a modest return to bonus payments and the granting of stock options, but the feel good factor will continue to be underpinned by rising property prices. Despite some uncertainty on the high street over Christmas, retail sales - as evidenced by a record number of new cars sold in 2003 - have generally held up well.

Peter Spencer comments, "With household incomes forecast to rise by 3.5% in real terms in 2004, falling unemployment, a rise in equity markets and a property market continuing to move ahead, the UK economy is in reasonably good shape to meet any external shocks."

But higher bills However, the feel good factor will begin to diminish as the year wears on. The ITEM Club is forecasting interest rates at 4.75% by December 2004 and reaching a peak of 5% by early 2005. This will impact not only the propensity for household borrowing and hence spending but also the continued growth in the housing market.

Spencer adds, "We are moving into uncharted waters. With indebtedness and house prices reaching record levels, it is hard to know precisely what impact higher interest rates will have on the UK consumer. What is more, the new (lower) CPI inflation measure adds to this uncertainty."

Euro bubble Another risk to the relatively rosy forecast of the UK economy remains the current outlook in the rest of Europe where, after all, the majority of our exports end up. The ITEM Club believes that the European Central Bank (ECB) should cut interest rates to address the dangerously high level of the Euro: Dollar rate and stimulate the Eurozone economy. As well as endangering the ability of UK and European exporters to compete on a level playing field in the US, the policy of apparent benign neglect in Washington and Frankfurt is increasing the possibility of a speculative bubble in the currency market.

Spencer is not too optimistic: "Unlike the MPC, the ECB appears squeamish about pricking bubbles. The obsession with inflationary targets and Trichet's reluctance to do anything about the Euro would if anything suggest interest rate rises are more likely in the months to come."

~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.

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junk
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One thing which always seems to get devalued is language, it seems that any increase in the price of anything is now called a bubble ...

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Stephen Burke

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