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Last Updated: Monday, 23 January 2006, 08:04 GMT
UK economy 'shows recovery signs'
The report says there may be a bumpy ride ahead in 2006
The UK economy is showing signs of reviving in 2006, the influential Ernst & Young Item Club has said.

But the body, which uses Treasury data in its research, also warns that there are concerns over long-term stability.

The group's winter forecast envisages 2.3% growth in GDP in 2006, after what it calls a "dismal" growth rate of 1.7% during 2005.

Strength in house prices, shares and other assets, coming after good winter shop sales, will aid growth, it said.

'Not out of woods'

The club also says that in a boost for Gordon Brown the Consumer Price Index (CPI) level of inflation has fallen back towards its target of 2% faster than "anyone dared hope".

That, it says, leaves the Bank of England's monetary policy committee (MPC), free to cut interest rates again if needed.

Yet, according to the body's chief economist Peter Spencer, there are still worries ahead.

"We are certainly not out of the woods yet," he warned.

"Growth is still well below par - just hitting the Eurozone average - and with consumer spending dropping and the pressure piling on exports to take up the slack, we could be in for a bumpy 2006."

Mr Spencer says a fall in the strength of sterling would help to aid growth in exports and investment, particularly in Europe and the Middle East.

Reduced borrowing

The club also says data shows the recent UK consumer spree - much of it fuelled by spending on plastic - has come to an end.

Spending rose by only 1.3% in 2005, the slowest increase in 10 years.

In April last year the club had complained that Gordon Brown had created no incentives to make the public spend rather than save.

Now it says that over the past 12 months households have reduced their borrowing and increased savings.

Debt remained at "historically high levels" which means there is much less scope for households to support their spending through increased borrowing.

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