Steady Economic Outlook For 2005

Economic Growth

The Organisation for Economic Co-Operations and Developments (OECD) has forecast that US economic growth will be 3.4% for 2005, although some experts think it may be higher. For Britain, the OECD has revised its estimate to 2.5%, down from 3.2%. Growth in Japan and China will also be slow in 2005 with the OECD forecasting 3%-4% and 8%-9% respectively. Economic growth for Europe is predicted at only 2%, although experts say that this could be improved if the Euro falls sharply, or if interest rates are cut by the European Central Bank (ECB).

The UK economy in 2005, is predicted to grow at a slower pace than last year, as house prices decline and consumer spending eases. This could raise prospects of the first cuts in interest rates since July 2003. George Buckley, an economist at Deutsche Bank AG, predicts rates will finish the year a half point below their starting point and said: “The consumer will be affected by a weaker housing market; global growth will be lower.”

Currencies and Interest Rates

Anatole Kaletsky, economist for The Times, believes that if the Euro starts to decline then the ECB will keep interest rates at 2% for most of the year, before increasing to 2.5% in the fourth quarter; resulting in the Euro ending 2005 much lower against the dollar and Asian currencies, and slightly lower against the pound. This would have a knock on affect on the European community as it would have to cope with weaker export growth stemming from the predicted behaviour in the US and China, combined with the hardening of the Euro.

Experts widely believe the US dollar will end 2005 on a high, with a report in The Independent on Sunday predicting it to be 40% up against major currencies.

However, providing the Euro softens, house prices should be sufficient to offset weakness and keep GDP growing by around 2%.

Housing Market

Forecasts for the UK housing market are varied, with industry bodies proclaiming both increases and decreases in house prices. The Centre for Economic and Business Research predicts that house prices will continue their recent 10% decline, to depreciate in value by 7% in 2005. The UK’s biggest mortgage lender, Halifax, also forecasts a drop in the housing market, but by a more conservative 2%.

However, industry body, the Royal Institute of Chartered Surveyors, predicts a 3% rise in house price and their estimation is echoed by Nationwide. Property research company, Hometrack predicts the market to stagnate with national house prices staying much the same.

Overall, the housing market is predicted to remain weak into the first half of 2005, according to the BBC. However, with the wider economic climate remaining fairly strong this year, and the expected upward trend in employment and income to continue at a steady pace, housing demand is likely to rise in the second half of the year and keep prices stable.

The global labour market is also expected to improve in 2005, according to a report in the Financial Times. This opinion is seconded by Mr Kaletsky in his 2005 predictions.

FTSE 100

The FTSE 100 looks set, from a consensus complied by MediaTelInsight of key industry forecast figures, to hit 5070 points by the end of 2005. The US, Asia-Pacific area, India, China, Turkey and the UK are predicted to perform well throughout the following year. The telecoms sector is also expected to see strong growth this year.

In summary, 2005 looks steady in terms of economic growth, with unemployment continuing its downward trend. Although the housing market looks weak for the beginning of the year, the outlook for property is to plateau.