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There may be trouble ahead says Ernst & Young

21 April 2008 / by Rachael Stiles
The UK economy should brace itself for further knocks to the housing and retail industries, according to the Ernst & Young ITEM Club spring forecast.

The ITEM Club (Independent Treasury Economic Model) is one of the UK's best-known and respected independent forecasting groups, renowned for being based on the same forecast model as the Treasury.

The current credit crisis, in which lenders and consumers alike are struggling to secure credit and the pound is steadily weakening, will continue to take its toll on the economy through the housing market and high street as the year unfolds, despite predictions that the Bank of England's base rate will drop to 4.5 per cent by the end of 2008.

Employment and manufacturing exports will benefit from the weak pound, but the outlook for other industries is bleak, the report said, with the economy facing a possible two years of sub-trend growth from 3.1 per cent in 2007 to 1.8 per cent this year and a further drop to 1.5 per cent in 2009, unless the Government "takes firm and decisive action".

"Although the UK economy has remained relatively buoyant so far this year, our reliance upon international banking markets means it is only a matter of time before it slows." said Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club. "This is going to be a rapid, painful adjustment and it will be a rough ride for a substantial proportion of the population. We are facing a massive sea change in the balance of economy."

The ITEM Club believes that the UK economy's dependence on overseas borrowing means that decisive action from the regulatory authorities is imperative in order to alleviate the damaging effects of the credit crunch, and that they should borrow to fund the mortgage lenders to prevent an over-reaction in vulnerable sectors.

The report also outlines the numerous hardships in store for the consumer, with rising mortgage rates, transport costs, food bills and energy costs; and suggests negative equity is a rising concern, as house prices will fall 10 per cent over the next two years.

Spencer concludes that it is not all doom and gloom, pointing to the "relative good health" of the UK economy and strong employment levels as things to be hopeful about. "We should be able to adjust to this situation if the Government takes decisive action now," he said. "Nonetheless, if it does not, the risks are plain to see, not just in the housing market and the high street. If sterling’s recent retreat turns into a rout, this would threaten a breakout of wage inflation, which could end 15 years of successful inflation targeting."

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