UK economy heads for ‘horror movie’
- added July 20, 2008
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BRITAIN is facing an “economic horror movie” because of a “toxic mixture” of a moribund credit market and volatile oil prices, according to a leading forecasting group.
The Ernst & Young Item club, which uses the Treasury’s economic model, will argue in a report tomorrow that the economy will struggle to avoid recession. This comes as a survey by the Institute of Directors shows that business confidence has slumped to the lowest level ever recorded, with company chiefs increasingly gloomy about the investment climate.
These reports follow an interview with Alistair Darling in which the chancellor admitted the downturn would be more “profound” and last longer than he had expected.
Also, Sir Win Bischoff, chairman of Citigroup, the American financial giant, believes that house prices in Britain and America will keep falling for another two years.
The Ernst & Young Item club predicts growth of only 1.5% this year, slowing to 1% in 2009. It says consumer spending will slow to a standstill, rising by only 0.2%, and forecasts a two-year drop in investment.
It also warns that the chancellor’s budget strategy has been thrown into “turmoil” by the downturn and an unplanned £2.7 billion tax giveaway. It predicts the budget deficit will top £50 billion and the “current” budget deficit, used to determine the golden rule, will remain in the red for at least the next three years.
Peter Spencer, chief economist at the Item club, said: “Both 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 - consumers will follow suit, moving from their current state of denial into a state of despair.”
Meanwhile, the Institute of Directors’ quarterly business opinion survey shows business optimism at its lowest level since the survey began in 1996. The proportion of company directors “more versus less” optimistic about their company’s prospects fell to -25%, compared with -17% three months ago.
The Ernst & Young Item club, which uses the Treasury’s economic model, will argue in a report tomorrow that the economy will struggle to avoid recession. This comes as a survey by the Institute of Directors shows that business confidence has slumped to the lowest level ever recorded, with company chiefs increasingly gloomy about the investment climate.
These reports follow an interview with Alistair Darling in which the chancellor admitted the downturn would be more “profound” and last longer than he had expected.
Also, Sir Win Bischoff, chairman of Citigroup, the American financial giant, believes that house prices in Britain and America will keep falling for another two years.
The Ernst & Young Item club predicts growth of only 1.5% this year, slowing to 1% in 2009. It says consumer spending will slow to a standstill, rising by only 0.2%, and forecasts a two-year drop in investment.
It also warns that the chancellor’s budget strategy has been thrown into “turmoil” by the downturn and an unplanned £2.7 billion tax giveaway. It predicts the budget deficit will top £50 billion and the “current” budget deficit, used to determine the golden rule, will remain in the red for at least the next three years.
Peter Spencer, chief economist at the Item club, said: “Both 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 - consumers will follow suit, moving from their current state of denial into a state of despair.”
Meanwhile, the Institute of Directors’ quarterly business opinion survey shows business optimism at its lowest level since the survey began in 1996. The proportion of company directors “more versus less” optimistic about their company’s prospects fell to -25%, compared with -17% three months ago.
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