ITEM club warns of battle against slump
4 Aug 08
Ernst & Young's economic think tank, the ITEM Club, warns that the 'toxix mixture' of a moribund credit market and volatile oil prices will ensure a tough time ahead
The UK economy will struggle to avoid recession in 2009, with a predicted GDP growth of 1 per cent, according to the ITEM Club. Its summer forecast says inflation will remain above the target range of 1 to 3 per cent for the next 12 months. It also predicts a substantial increase in the numbers of unemployed.
Peter Spencer, chief economist to the club said: “On the high street and in the housing market it is going to get a great deal worse before it gets better.
“We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled. Our worry is that without the usual medication from the Bank of England – which would have nasty inflationary side effects in this environment – the consumer will follow suit, moving from their current state of denial into a state of despair.”
Consumers and the Government have been living beyond their means for the past few years, the ITEM Club, by over-borrowing. Against the current bleak background, consumer spending is unlikely to defy gravity any longer, while the public finances face a similar strain.
Spencer said: "Households will be lucky to see real disposable income growth of 1 per cent this year, with perhaps 1 per cent in 2009… The forecast shows consumer spending growing by just 0.2 per cent next year."
The Item Club also predicts:
• Oil prices will peak at $150 a barrel this summer, before easing towards $100 over the next two years.
• The credit crunch will continue in the short term and house prices have significantly further to fall, dropping by 10 per cent through 2008 and a further 6 per cent through 2009.
• A slowdown in high street spending could pave the way for a rate cut, possibly in November.
• Unemployment will reach two million by the end of 2010, but the rise will be mitigated by the “reversal of immigration flows”.
• The falling value of sterling will create opportunities for British businesses.