The UK Economy

National Institute Economic Review, July 2005 | Go to article overview

The UK Economy


* GDP is expected to grow by 2 per cent this year and around 2 1/2 per cent per annum for several years after that.

* Falling world interest rates mean that UK interest rates can fall without inflation rising far above its target. Our forecast assumes a reduction to 4.5% this year with further reductions next year.

* The revision to the timing of the economic cycle does nothing to reduce the need for tax increases. The fiscal gap to be closed remains at up to I per cent of GDP.

* Even in the current cycle, with the Golden Rule correctly measured our expectation is that the rule will only just be met.

* A comparison of the National Institute's forecast record with that of the Treasury since 1997 shows that the Treasury is wrong to claim it has a better forecasting record.

We anticipate growth of 2 per cent this year followed by 2.5 per cent in the next few years. Some acceleration in growth from current growth of 1.6 per cent per annum is needed in order to deliver this and for this reason it is possible for interest rates to fall to 4-4.25 per cent over the next year or two before rising again to a steady state value which we put at 4.5-4.75 per cent.

The economy is becoming better balanced, with growth of consumer spending at only 1.7 per cent for the next few years and growth of government consumption expected to slow further. The household savings ratio is expected to rise from 4.2 per cent last year to 5.7 per cent this year with further increases in 2006 and 2007 as consumers aim to rebalance their savings in the light of stable house prices. After a weak start to the year exports are now performing better, probably supported by rising demand from oil-producing countries. Next year and in 2007 export growth is expected to exceed import growth. Investment is also expected to grow faster than GDP.

Rising input prices have not had much impact on output price inflation. With earnings still growing strongly we expect to see it settle just above its target next year and then to remain close to target.

The Government's revisions to the estimates of the economic cycle are not reflected in our own measure based on an industry standard. …

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