Treasury needs more gumption, says ITEM Club

The E&Y ITEM Club has called on the Treasury and Bank of England to adopt a more innovative attitude to boosting GDP, or risk sluggish growth for two years.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
When the E&Y ITEM Club speaks, economists and even occasionally politicians tend to listen. The forecaster uses the same model as the UK Treasury to see into the UK’s economic future, and usually produces eerily accurate predictions.

In its latest report, the Club predicts GDP growth of just 0.9% this year, 1.9% in 2014 and 2.5% in 2015. The 0.9% for 2013 is less than the 1.2% predicted by government and reflects the ‘low-growth landscape’ says the Club.

Economic headwinds threaten to blow even this modest growth off course, adds the report. The eurozone may be gradually moving away from the danger zone, but ‘the impasse on US fiscal policy now clouds the outlook for trade’. By next year, however, the Club predicts a triumphant recovery for the US economy, which will have positive knock-on effects around the world.

Indeed, the Club is full of praise for the US central bank, the Federal Reserve, for putting a rocket under US GDP. Peter Spencer, chief economic adviser to the Item Club, explains: ‘It now actually has a target for unemployment - 6.5% unemployment with an inflation override - that's the sort of imagination that is actually putting a floor under the US economy and allowing it to continue to move forward.’

In contrast, Spencer is scathing about our own Bank of England, which is clinging to its one 2% inflation target for dear life. The target has become a ‘risk to the credibility’ of the Bank, he says, and is ‘long-past its sell-by date’.

The GDP growth figures for the last quarter will be released on Friday, but till then the Club’s message is not to expect much of a boost. UK productivity remains low, despite modest increases in exports, business investment, employment and mortgage lending. While the UK officially exited recession in the third quarter of last year, growing 0.9%, this figure was flattered by their comparison to the previous three months, where output fell thanks to the extra bank holiday to celebrate the Queen's Diamond Jubilee.

Spencer says: ‘The UK has crawled out of recession, but the government's mid-term report card should read 'could do better'. A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth.’

Unless the Treasury adopts a more innovative attitude to boosting GDP, says the report, be it through funding infrastructure investment or boosting the housing market, the UK will be doomed to listless growth for two more years.

But at least the report ends on a brighter note: ‘Healthier growth rates hold off until 2014-15 and a durable recovery awaits a return of confidence in financial and business communities.’

Only another year or so of economic misery then…

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