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ITEM Club forcast - 3.5% GDP growth & strength in all industries

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      07-19-2004, 01:43 PM
From the Ernst & Young ITEM Club -

"An economy that is Va-va-voom as full employment beckons.

Disappointing tax take and worsening public finances may mean problems
post election

London 19 July 2004: The latest ITEM Club forecast predicts a UK
economy that is in great shape for 2004 and beyond, with GDP growth
expected this year of 3.5% and 3% in 2005.

The world economy has just had its best quarter since 1988 driven by
the US and China who are even dragging Japan and the Eurozone in their
wake. This has proved particularly good news for UK exporters.

Professor Peter Spencer, chief economic adviser to the ITEM Club,
explains, "With a global economy firing on all four cylinders and a UK
economy in its best shape since the late 1990s, we can look forward to
robust growth over the next two years. Even if you regard the full
employment measure as largely symbolic, the fact that the Government
will be able later this year to announce that it has been achieved is
a ringing endorsement for their management of the economy."

Strength across the board
The strength of UK plc is now visible right across the board in the
high street as well as the office and factory floor. Despite the
recent upswing in interest rates the housing market continues to defy
some economic pundits who have been predicting an apocalyptic
downturn. The ITEM Club forecast shows that as interest rates peak
next summer at 5.5% the house prices will flatten out.

Companies are hiring again across all industry sectors including
manufacturing and recent business surveys have demonstrated near
record levels of optimism from boardrooms. Indeed as ITEM has
commented recently we believe that the official statistics are
actually underplaying the strength of the economy.

The day after the election
So why despite all these positive indicators is ITEM concerned about
the prospects for an incoming Chancellor post election? As the ITEM
Club first highlighted last autumn, the combination of the continually
high levels of public expenditure and unrealistic assumptions by The
Treasury about the amount of tax that it can collect means that there
will be very little room for manoeuvre on fiscal policy for any
incumbent (new or current).

Spencer explains, "We still believe that the Chancellor will have to
be careful about breaching the Golden Rule this side of an election
and indeed is very likely to do so afterwards, with the loss of
credibility that this would entail.

"Although the overall strength of the economy means that any potential
shocks to the system can probably be dealt with reasonably
comfortably, the scale of the public deficit is an unwelcome
inheritance for any of his potential successors."

Clouds on the horizon?
Although many of the indicators are so positive, total household debt
in the UK is approaching the £1trillion mark, 80% of which is directly
linked via mortgage payments to future rises in interest rates. The
ITEM Club believes that without a drastic increase in mortgage rates
and without a jump in unemployment, which would then lead to a large
number of forced sellers, a crash in the housing market remains a
distant possibility.

Spencer again, "With a prosperous economy and relative low interest
rates and unemployment, a dramatic post-election correction in house
prices is unlikely. However, the next few years will only see a modest
increase in property values and individuals banking on house price
inflation to pay for their retirement will suffer the same
disappointment as those who relied on the equity market bubble of the
late 1990s."

The other concern at the moment in the global economy is the price of
oil. As oil prices remain stubbornly around the $40 a barrel mark ITEM
does see risks to world trade and exports, particularly to the US. As
Spencer explains, "Even though the UK is less dependent on imported
oil, if the $40 a barrel level is maintained it could take 0.5% off
GDP next year."


Editors' notes

The ITEM Club is the only economic forecasting group to use the HM
Treasuryís model of the UK economy. Its forecasts are independent of
any political, economic or business bias and this independence is
underpinned by the untied sponsorship of Ernst & Young LLP. ITEM
stands for Independent Treasury Economic Model.

HM Treasury uses the UK Treasury model for its UK policy analysis and
Industry Act forecasts for the Budget. ITEMís use of the model enables
it to explore the implications and unpublished assumptions behind
Government forecasts and policy measures. Uniquely, ITEM can test
whether Government claims are consistent and can assess which
forecasts are credible and which are not.

The ITEM Club was founded by a group of companies who wanted to obtain
economic forecasts focused on business. The Club's corporate members
are all major UK or global organisations (Ernst & Young is not a
member but is the sole sponsor). Members span a range of industry
sectors, and have the opportunity to discuss each forecast before it
is finalised so that it can take account of their current business
experience. This ensures that ITEMís forecasts and analyses are
particularly relevant for business and are not just academic or
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