The latest Ernst & Young Independent Treasury Economic Model (ITEM) Club Winter forecast for the UK economy predicts growth in GDP of 2.9% in 2007, as the City continues to drive corporate activity.
The positive outlook for the economy is ultimately being propelled by the confidence of firms in the business and financial services sector.
According to Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club: “Stock exchange and M&A transactions have been steaming ahead and business investment has picked up in the last twelve months, helped by the buoyant economy and rising profitability. The ITEM forecast shows business investment growing by another 7.5% in 2007.”
Spencer added: “Simultaneously the post-millennium surge in buy-out activity and delisting spurred by private equity firms mean that a large swathe of UK plc has now been pushed into a very different governance and incentive framework, designed to increase effort and efficiency.”
Although corporate Britain is booming with the strongest confidence levels in a decade, particularly in the financial services sector, the mood on the high street is not quite as upbeat.
Spencer said: “With the personal tax burden at record levels and high utility prices, it’s not surprising that the consumer is feeling a bit short-changed. By the spring, though, we should be seeing a decline in utility prices as the impact of lower raw material prices feeds through, coinciding with an increase in overall employment and an improvement in pay packets.”
ITEM believes that the strong growth in UK labour supply – based on immigration and the return of older workers to the workforce – and the fall in world oil and commodity prices should be sufficient to bring consumer price index (CPI) inflation back down to the 2% target by the end of the year without another rise in interest rates.
However, said ITEM, the monetary policy commission (MPC) at the Bank of England will not hesitate to raise interest rates again if there are more definite signs of headline inflation pushing up wages.
Moreover, Spencer said: “The growth of money and credit is worryingly high in real terms. This monetary expansion is inflating asset prices and transactions and boosting both the activity and the profitability of financial services.
“If asset valuations continue to rise there will be a strong case for raising interest rates higher later in the year to bring the markets to heel and protect the economy from a financial crash.”
Spencer concluded: “The US market still looks robust and key European markets remain strong. It’s important to remember that we still enjoy a stable global macroeconomic environment which will remain benign as long as inflation remains low.”
Speaking at the recent International Monetary Fund (IMF) annual press conference, Rodrigo de Rato, the IMF’s managing director, said that after four years of strong growth, the IMF expects that global growth will remain solid in 2007, approaching 5% (see IMF Predicts Robust Global Economy For 2007).
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