Ernst & Young ITEM Club Spring forecast
- From: Daytona <me@xxxxxxxxxxx>
- Date: Tue, 24 Apr 2007 14:27:48 +0100
Businesses Enable Brown to Bow out in Style, says ITEM
but are we all living beyond our means?
London 23 April 2007The UK economy is running at full tilt, according
to the Ernst & Young ITEM Club Spring forecast with growth
increasingly being driven by business. ITEM, which is predicting
growth of 2.9 % GDP for 2007, says that a rapidly expanding business
sector is now driving UK economic growth faster than household or
government spending. In the final quarter of last year business
investment shot up by 4.5 % to 13.5% cent higher than 12 months
earlier.
Professor Peter Spencer, Chief Economic Advisor to the Ernst & Young
ITEM Club, explains, ?The corporate sector ? particularly services -
is now the UK?s economic engine room. Monetary and credit conditions
are fuelling the economy by boosting asset prices and transactions.
Business is expected to provide the main impetus this year as buoyant
housing, stock market and M&A activity drive growth in the UK
financial and business services sector.?
Gordon ? Going out with a bang?
This is the 40th ITEM Club forecast to be released whilst Gordon Brown
has been Chancellor. Given this is likely to be the last he certainly
appears to be leaving No 11 on a high but what kind of an inheritance
is he bequeathing to his successor?
ITEM believes that the current benign macroeconomic environment has
made both individuals and corporates overly relaxed about risk,
inflating asset values and transactions and boosting borrowing and
spending. Homeowners have been under pressure from rising tax and
utility bills, but all the indications are that they have kept
spending as if it was going out of fashion. The saving ratio has
fallen back to just 3.7 % meaning that many households are borrowing
to finance current spending.
Spencer says, ?Many people are following the Chancellor?s lead and are
borrowing to finance consumption. The UK?s current deficit has reached
3.5 % of GDP which suggests that as a country we are close to the
edge. Ultimately, we are all skating - not to say wobbling - on thin
ice. There?s a danger that we are slithering into complacency.?
Interest rate hike - putting a lid on expansion
Although the pay round has been very subdued and inflation is set to
fall sharply over the next few months as past energy price increases
fall out of the calculation, ITEM expects that the Bank of England
will increase interest rates to 5.5 % in May ? the highest since 2001.
Spencer says, "CPI inflation moved up to a record 3.1% in March,
requiring a letter of explanation from the Governor of the Bank of
England to the Chancellor. However, the MPC correctly anticipated an
inflation surge and started to raise interest rates last August. That
was a surprise to the markets, as was the more recent January increase
but it is clear that interest rates will be pushed up again to 5 ½ %
after the May MPC meeting, putting them 1% above their level in early
August.?
Labour market is thriving
The corporate expansion is also providing good news for the labour
market which remains strong. Spencer explains, ?The number of job
vacancies in the three months to February is about 6 % higher than a
year earlier. With GDP rising above trend this year, our forecast
shows a further 300,000 new jobs being created in 2007, similar to
2006, and another 200,000 in 2008.?
Gordon Brown: the champion of borrowing
The forecast also highlights the large current deficit in the public
sector which has built up despite the strength of the economy and
buoyant tax revenues. Government spending is yet again turning out
higher than the Treasury anticipated. Overall public sector net
borrowing is now expected to be £34 billion in 2007- 2008, up from the
PBR projection of £31 billion.
Spencer comments, ?Both as individuals and as a country we have
borrowed a huge amount to support this growth. The bottom line is that
we are all living beyond our means. In the short term, Mr Brown has
resorted to borrowing for consumption. If the Chancellor is forced to
borrow so much when the economy?s so sweet, what will happen when it
turns sour??.
The sun continues to rise in the East but clouds are gathering in the
West
Further a field there are other clouds on the horizon with the patchy
performance of the American economy posing the greatest risk. Core US
inflation is now stubbornly high, reducing the scope for interest rate
cuts as the housing and mortgage markets continue to threaten the
consumer.
Spencer explains, ?The outlook for the world economy still looks rosy
provided that the sun continues to rise in the East. However, the
problem is that these economies are heavily dependent upon US imports
of consumer and intermediate products like PC chips, and on domestic
investment, both of which are heavily geared towards the US.?
These are also long-term risks with the current weakness of the dollar
as Spencer concludes:
?The recent strength of sterling has already caused problems for the
UK economy with exports particularly weak to non-EU countries at the
end of last year. ITEM is already predicting a decline in UK exports
in 2007. With the pound above the symbolic $2 level, there?s obvious
concern about the pressure on the beleaguered manufacturing sector.?
http://www.ey.com/GLOBAL/content.nsf/UK/Economic_Outlook
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