The latest economic forecast from the National Institute of Economic and Social Research (NIESR) says that the UK economy will grow by 2.7%, boosted by buoyant business investment which will rise by 8.2%.
The NIESR says that consumer price inflation rose to 3.1% in the year to March, prompting the first explanatory letter from the Governor of the Bank of England since it was made independent in 1997.
The NIESR adds that assuming that the base rate rises from 5.25% to 5.5% in May, it expects inflation to be close to the 2%target in a year’s time.
UK consumer spending is predicted to increase by 2.7% this year, slowing to 2% in 2008.
Martin Weale of the NEISR said of the UK forecast: “One of the major adverse developments affecting the United Kingdom economy over the past twenty years has been the rise in house prices. The Nationwide House Price index shows the average price is 4.3 times its value in the first quarter of 1987, an average rate of increase of 7.6% per annum.
“Over the same period the Retail Price Index excluding mortgage interest has risen by 3.4% per annum, giving a real rate of return of 4% annum over and above the benefits to owner occupiers of being able to live in houses that they own without paying rent. Making the modest assumption that the rental yield is 3% per annum after allowing for maintenance costs, the total return on housing over this long period has been 7% per annum in real terms.
“For owner occupiers there have been no taxes to pay on this apart from Council Tax. The real return on equities has been similar. However the typical investor in equities would have had to pay income tax or its equivalent on the dividends and would probably also have paid capital gains tax as capital gains were realised. Even for a standard rate tax payer these reduce the rate of return to below 6% per annum, and the return on equities has been much more volatile than that on housing.
Globally, GDP is forecast to rise by 5% in 2007 and by 4.8% in 2008, with the US Economy predicted to expand by 2.6% a year in 2007 and 2008.
The Euro Area will grow by 2.5% in 2007 and 2.3% in 2008, says the NIESR, whilst Japan will grow by 2.3 per cent in 2007 and 2.4 per cent in 2008.
It adds that despite some tremors in financial markets and a bounce-back in the oil price to over $60 a barrel, the global economic outlook remains set fair.
After expanding by 5.3% in 2006, one of the fastest rates in the past 35 years, the world economy will grow almost as fast in 2007. China’s extraordinary growth of 10% a year continues to underpin the global upturn. Although the American economy is slowing, the Euro Area will perform rather better in 2007 than once feared.
A report from Euroframe in March said that The UK economy is expected to grow by 2.75% in 2007, with growth moderating by just under 0.25% points in 2008 (see Ofcom Plans New Public Service Channel To Rival BBC).
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