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Sarah
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Joined: 16 Jul 2004
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 Posted: Thu Aug 03, 2006 1:04 pm Post subject: UK economy to grow around trend in 2006-8, inflation 2%+ |
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The UK economy is expected to grow around its trend rate over the next few years as stronger investment and trade offset subdued consumer spending, while CPI inflation is expected to remain above 2 pct, a leading UK think-tank found.
The National Institute for Economic and Social Research predicts the UK economy will grow by 2.5 pct this year, unchanged from its previous forecast in April.
For 2007 and 2008, however, NIESR cut its forecast for GDP growth to 2.6 pct from 2.75 pct previously to take account of the effect of the recent sharp rise in oil prices, expectations of higher interest rates and the rise in the value of sterling.
Growth in consumer spending, though expected to pick up, is likely to be weaker than most of the past decade. On the other hand, NIESR anticipates that both net trade and investment will rise by more than they have in recent years as the economy continues to rebalance.
This, however, will leave the UK economy more reliant on global developments in the years ahead, it said.
Inflation is expected to remain slightly above the Bank of England's 2.0 pct target, with CPI forecast at 2.2 pct by the fourth quarter of 2006. This is below the previous forecast of 2.4 pct, but NIESR raised its forecast for the end of 2007 to 2.3 pct from 2.2 pct previously.
Upward pressure on inflation will come from higher oil prices, and as non-oil goods imports prices start rising. This will be moderated, however, by the recent appreciation in the sterling exchange rate and by subdued wage pressures, NIESR said.
Meanwhile, the continued surge in migration from new member EU states will help to contain pay inflation, while higher pension costs are also likely to make employers less willing to raise wages.
The forecasts are based on market expectations for interest rates, which incorporate two 25 basis point rate hikes, one this year and one next year.
However, NIESR believe there is a case for the Bank of England to raise rates sooner rather than later, though there is no pressure for them to do so as long as inflation expectations stabilise.
The Bank of England's Monetary Policy Committee meets next week and is broadly expected to leave rates unchanged again at 4.50 pct.
Meanwhile, NIESR said UK public finances are 'looking healthier'. It still expects the Treasury will fail to meet the 'Golden Rule' of borrowing only to invest over the economic cycle, but only just.
The current budget deficit is expected to narrow to 0.8 pct of GDP in 2006/7 and to 0.3 pct in 2007/8 from 1.0 pct in 2005/6. NIESR expects public sector net debt, which is supposed to stay below 40 pct of GDP, will inch up to 37.7 pct in 2007/8, though this is below its previous forecast of 39.2 pct.
On the international front, NIESR continues to forecast rapid global growth over the next few years.
Global growth is expected to rise by 5.1 pct this year and by 4.7 pct in 2007. Inflationary pressures are rising, mainly due to higher oil prices, but the impact of rising oil prices on inflation and output are 'much more muted' than in the past, it said.
It reckons the US economy will grow by over 3 pct this year and next, while Japan is poised for growth of 3.1 and 2.6 pct over the two years as the economic recovery becomes more self-sustaining.
The euro zone is expected to grow by around 2 pct in both 2006 and 2007, with inflation averaging about 2.5 pct in both years, NIESR said |
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