The economic down turn in the UK is over.

With talk of a potential crash in house prices, gradually rising unemployment, a High Street that can’t get beyond first gear and a manufacturing sector that would be grateful if it could even hit first gear, you could be forgiven for thinking the UK was about to go off the rails. But according to the latest report from the respected Item Club, from Ernst and Young, the UK is expected to bounce back strongly over the next few years managing 2.6% growth next year, and an impressive 3% in 2007.

As for 2006, it reckons the UK will mange an adequate 2.3%.

Meanwhile the Office of National Statistics has released its latest data for the economy, showing that the UK managed a 0.6% quarter on quarter growth in the first quarter of 2006. The UK has gradually been picking up from a low point of 0.3% growth 12 months ago.

While the US is enjoying faster growth, and the tiger economies much faster expansion still, it would appear that once again, the UK is leaving our EU cousins behind.

The Item club also predicts steady inflation in the years ahead, jumping to an above target, but hardly worrying, 2.1% this year, followed by 2.2% the next, before falling back to below the Bank of England’s target of 2%.

The Item club said “The Buoyancy of the housing market and the potential weakness of sterling in response to rising interest rates will make the Monetary Policy Committee reluctant to cut interest rates to stimulate demand. However, the housing and equity markets will support consumer spending, and a weaker pound will help exports. Exports are now moving ahead strongly with the European economy and could – for a change- surprise on the upside.”

But, that scourge of the UK economy, anaemic investment, is expected to remain below the average seen in our main economic rivals.

The question is this: how can the UK grow so fast, when employment levels suggest that is little scope for extra production, and low investment suggests productivity will stay low?

The item club says it’s down to immigration and that the unexpected consequence of the UK being one of only three EU countries to immediately sign up to freedom of movement of labour in 2004. Its chief economic advisor, Professor Spencer said “The steady flow from the most recent accession countries to the UK has proved remarkably positive for the economy, keeping interest rates a half a per cent lower than they would otherwise have been. From Poland to Slovenia these individuals have plugged gaps in a variety of industries, from agriculture to hospitality and catering, with nearly 300,000 immigrants taking new jobs in the UK in the last thre years. Unlike previous occasions that have been confined to major urban centres, this influx has benefited many regions across the UK from East Anglia to Edinburgh.”
He adds, “As a direct result the UK workforce has become younger, more flexible and economical, easing the pensions burden and keeping interest rates lower than many commentators could have predicted. Even with a modest rise in unemployment numbers we are looking at a very favourable cost-benefit ratio.”

© Investment & Business News 2013