UK economic growth set to decline

24-07-2006

Economic growth in Britain will slow after "seven years of plenty" due to heavy government and consumer spending, a new report has claimed.

An anticipated slowdown in consumer spending amid increasing energy costs will see the country's economy decelerate over the next couple of years, according to the Item Club, an independent economic forecaster sponsored by Ernst & Young.

The group, which uses the same economic model as the Treasury to determine the health of Britain's economy raised its growth forecast for the present year from 2.3 to 2.5 per cent, but warned that the impact of increasing household bills would lead to a fall in growth in 2007 and 2008.

The Item Club revised its forecast for growth in 2007 from 2.6 per cent to 2.5 per cent and from three per cent to 2.8 per cent for 2008.

Warning that the consumer boom of recent years had reached an end, the group warned that economic growth was now dependent on exports, investment and the strength of the world economy.

But the Item Club's chief economic advisor, professor Peter Spencer, stressed that British manufacturers were failing to keep up with their global competitors.

"Until UK manufacturers manage to break out of the vicious circle of low profitability, low investment and a lack of cost control, the medium term prospects for exports remain poor," he added.

However, the group said that there was still enough room for the UK economy to grow without pushing up inflation.

Figures released last week showed that rising energy prices had increased inflation to 2.5 per cent, but despite the increasing price of oil, the Item Club said that inflation was likely to fall below the Bank of England's two per cent target by the end of next year.

It said that the bank would subsequently be able to leave the level of interest rates unchanged at 4.5 per cent, rejecting speculation that policymakers will be forced to increase the cost of borrowing in a bid to control growing inflation.


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