Are things NICE again. The four letters sum up one of the economic world’s most contrived acronyms, ‘non inflationary consistently expansionary’, and for the years of the Blair and Brown double act, and for that matter, for the latter years of the Major premiership, have summed up the UK economy.
But of late, this seemed to be changing. Inflation was building, just as growth was falling. It was like the bad old days, or to put it into terms that would make an acronym, ‘Corrections Recessions And Payback’.
But now, the ITEM club, from Ernst and Young, has presented its latest research into the economy, and it’s good news, twice over.
It’s predicting a rise in GDP growth to 2.9% next year and continuing into 2008, while CPI inflation falls back into line with the 2% target.
“The economy is being pushed along by buoyant money and credit conditions, which are stimulating property, equity and other asset markets. Increases in asset prices and transactions make people feel better off and stimulate earnings and employment in business and financial services”, says the ITEM club. Under normal conditions, this would also be a recipe for inflation. But not this time, theorises the report, because the strength in demand is being matched by supply, coming “both by higher participation and by immigration over the last two years.”
As for the rate of interest, it’s predicting that rates will hit 5 percent, but then just about every economist, and their dogs, expect this to happen next month anyway, but then, says the ITEM club, things are finely balanced and it’s not yet clear whether there will be further hikes.
If house price inflation accelerates, interest rates are likely to be increased further next year. On the other hand, if demand weakens next year, interest rates could be cut as the CPI falls.
The UK is producing below capacity, says the ITEM Club. Labour supply is up 1 percent, adding that to growth in productivity, then the UK should have been able to chug along at 2.75 to 3 percent over the last 12 months. But, in fact, growth fell to 1.9 percent, below par, and leaving output consistent with stable inflation.But, it wasn’t all good news. August saw the biggest leap in the money supply since the early ’90s, with the M4 money supply accelerating to 13.7% in the year to August (up from 6.3% in August 2003). At the moment, economists are scratching their heads over this. The Bank of England is not sure why, but if the rise seen in August starts to become a trend, then prices will come under pressure.
But, while the bulls at the ITEM club make these nice forecasts, things are not so rosy, if you listen to the CBI in its latest Industrial Trends survey. Every month it asks manufacturers whether order books are up on last year. And over the last three months the balance between those saying it was up and those saying it was down was minus five. That’s worrying. But even more worrying has been how rapidly the monthly index has been declining, with October seeing the monthly index fall to minus 20, from just minus in September.
The CBI also reckons price pressures are building and warns that: “Firms are still hoping that they will be able to pass on some of their higher costs to UK customers next quarter – a balance of plus 12 expects average domestic prices to rise.”
The CBI puts the fall in its index down to the declining US economy – which is in extraordinary contrast to the buoyant markets stateside – see above.
For further information
Economic Outlook for BusinessITEM Club
© Investment & Business News 2013