UK economy outshines its peers

The UK should avoid falling into recession despite the slowdown affecting other countries, an influential report has said, crediting shoppers for Britain's economic resilience.

UK plc clearly has much to thank consumers for

Prof Peter Spencer

The Ernst & Young Item Club quarterly report - which uses the Treasury's model for growth - has predicted growth of 2.2% this year, easing back to 2% in 2002, before accelerating to 2.9% in 2003.

The finding comes days after a leaked briefing from the Organisation for Economic Co-operation and Development predicted UK growth of only 1.9% this year.

The Item Club report credited UK consumers for the relative strength of the country's economy, but warned that spending will begin to slow following the recent wave of job cuts.

'Cat with nine lives'

"UK plc clearly has much to thank consumers for," said Professor Peter Spencer, economic adviser to the club.

Consumers are simply not in a position to take the edge off the impact of a precarious US economy and slowing world trade

Prof Peter Spencer

"The UK consumer is starting to look like the proverbial cat with nine lives - despite worries about the international situation and job prospects."

He added that it was a "bit perplexing" why UK consumer confidence had held up so long, in the face of downbeat economic news.

Monday's report warned that the UK housing market, consumer confidence and High Street sales would begin to weaken because of corporate cutbacks, although the economy would remain "far from collapse"

Falling short

Professor Spencer also credited the "strong leadership" show by Prime Minister Tony Blair since the terror attacks on the US for much of the UK's economic resilience.

Business is facing the biggest challenges since the early 1990s recession

Ruth Lea
Institute of Directors

But the UK economy is set, nonetheless, to grow by less than Treasury forecasts.

UK Chancellor Gordon Brown originally forecast that the economy would grow by 2.25-2.75% this year.

"Consumers simply are not in a position - as Gordon Brown seems to think - to step into the breach and take the edge off the impact of a precarious US economy and slowing world trade," Monday's report said.

'Sit tight'

The report also warned that the weakness of the US and European economies over the next 12 months will keep the pound strong and depress profitability.

The Bank of England would be wise to sit tight for the time being

Professor Peter Spencer

British businesses have been coping with the strong pound through outsourcing, moving production abroad and forcing up productivity at home.

Nonetheless, Professor Spencer urged the Bank of England against introducing further interest rate cuts, urging it to "wait and see" how the economic situation unfolded.

Economic and policy chiefs in the UK and the US to defer any more action until a clearer picture emerges about the state of the economy during the last three months of the year, he said.

Business pessimism

A second survey, also released on Monday, showed that business optimism is declining, despite the relatively upbeat news from the Item club.

The Institute of Directors survey suggested that business optimism has slipped to its lowest level since the second half of 1998.

Company performance and output growth both weakened between June and September, while export orders remained weak, the survey said.

"Business is facing the biggest challenges since the early 1990s recession," said Ruth Lea, head of the policy unit.

But while certain sectors are facing difficulties, the survey concluded that the UK will avoid a full blown recession.