By Ruth Alexander The UK economy will achieve GDP growth of no more than 2% this year and in ...
By Ruth Alexander
The UK economy will achieve GDP growth of no more than 2% this year and in 2002 but will fare better than the US due to the flexibility of its interest rates, according to Peter Spencer, the Ernst & Young Item Club's economic adviser.
Spencer disputes Gordon Brown's estimation that the economy will see GDP growth of between 2.25% and 2.75% this year. He said the economy is slowing and that little beyond 2% can be expected.
According to Spencer, the club's research has shown the necessity for interest rate cuts to 5% before year-end to combat recessionary tendencies.
He said: "The most obvious threat comes from the US, but UK consumers have been spending more than they are earning and are feeling the pinch now that stock market gains and millennium bonuses have evaporated. The effects of a fiscal drag continue to eat into savings, too."
Spencer said consumers are not in a position to step into the breach and take the edge off the impact of a precarious US economy and slowing world trade.
He said: "Thus far, we have found that the UK has weathered recessionary squalls very well. However, the huge raft of profit warnings in the technology and manufacturing sectors both here and in the US make a storm look increasingly likely."
Spencer said the US stock market is not responding to interest cuts as it did in 1998. He said inflation is embedded in the US economy, rendering this medicine ineffective.
He added: "Suddenly, Alan Greenspan is losing credibility and a lack of confidence is starting to worm its way through the US economy, resulting in the 86,000 drop in employment during March alone. This risk of a sustained depression in equity prices now moves the US to provide an additional economic variant on its prediction for the coming year.
"If Greenspan does not manage to save the day and talk the stock market back up, we forecast a growth rate of 1% this year and the next year, assuming the Bank of England cuts interest rates to 3.5%."
Spencer said it is not the growth angle that is important but the fact that the Bank of England, unlike Greenspan, is free to cut interest rates in a non-inflationary environment and cut them again if it has to.
He said: "That is why we think that if the US goes downhill, the UK will not fare so badly. Interest rate flexibility will insulate us from some of the worst."
"What's more, the British economy is in a pretty robust state. Any of the huge problems that have been thrown at the economy over the last three months Ã the US slowdown, the stock market crash, our own technology bubble bursting, extreme weather conditions, transport problems and foot and mouth Ã would have sent business and consumer confidence into a tailspin elsewhere or in the past."
In the light of the upcoming election, research conducted by the group also explored the link between economic performance and politics. Spencer said there is no longer any guarantee that the consumer will give politicians credit for low interest rates.
£92bn transferred since 2015
Achievements, charity work and other happy snippets
Since first announcement