The UK economy is set to grow at or just above 2.5% per annum both this year and next, according to the latest forecast from the National Institute of Economic and Social Research (NIESR).
The NIESR says that assuming interest rates are raised to 5% per annum in November and 5.3% per annum early next year, it expects inflation to rise only slightly from its current level before falling back to the target of 2% per annum by the end of next year.
Despite this, there is unlikely to be room for more than a very small eventual reduction in interest rates which it expects to stay at or above 5% per annum. However, unforeseen future events could lead to further rises instead of the slight reduction in its forecast.
With regards to the global economy, the NIESR says that growth in Europe is expected to reach 2.5% this year and then fall back to 2% next year and in 2008.
Japanese growth is expected to be 2.7% this year, falling a little to 2.6 next year and then 2.3% in 2008.
Whist the USA is expected to grow slightly faster, at 3.3% this year, 2.6% next year and 2.4% in 2008, growth in both GDP per capita and GDP per person of working age in France, Germany and Japan is expected to exceed that in the US during 2006-10, contrasting with the US lead in the first half of this decade.
Although Italy’s performance is expected to be weaker, says the NIESR, the Italian economy is likely to perform better than it did in 2001-05.
The NIESR adds that the US housing market and over investment in China pose risks to its forecast, but neither are expected to have a major effect on growth in the rest of the world.
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