U.K. Economic Growth Forecasts Cut on Budget Squeeze, Ernst & Young Says
Bank of England policy maker Andrew Sentance had called for an increase in the benchmark interest rate, but was overruled. Photographer: Jason Alden/Bloomberg
July 26 (Bloomberg) -- Andrew Goodwin, a senior economic advisor for the Ernst & Young LLP’s Item Club, talks about the outlook for the U.K. economy. Gross domestic product will rise 2.2 percent next year, compared with a prediction in April for 2.7 percent expansion, the research group, which uses the same forecasting model as the U.K. Treasury, said today. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
Ernst & Young LLP’s Item Club cut its U.K. economic growth forecasts for the next three years and predicted the Bank of England probably won’t raise interest rates until 2014 because of the government’s budget squeeze.
Gross domestic product will rise 2.2 percent next year, compared with a prediction in April for 2.7 percent expansion, the research group, which uses the same forecasting model as the U.K. Treasury, said today according to an e-mailed statement. The economic revival will be “slow” and “patchy” as GDP climbs 1 percent this year, the group said.
Bank of England policy makers mulled expanding stimulus this month after the economic outlook “deteriorated a little” because the government announced the deepest spending cuts since World War II to curb the record budget deficit. The majority of officials voted for no change to the bank’s benchmark interest rate, overruling Andrew Sentance’s call for an increase.
“The new coalition’s plans to cut the deficit are certainly ambitious,” Peter Spencer, chief economic adviser to the ITEM Club and a former U.K. Treasury official, said in the statement. “Growth will struggle to reach 1 percent this year but will gradually speed up in the following years to give the U.K. a high-quality recovery based on trade and investment.”
The potential impact on Britain’s exports from the sovereign debt crisis in the euro zone and the “significant” budget tightening will mean the Bank of England will not raise its main interest rate from a record low of 0.5 percent for the next four years, the Item Club said. An expansion of the central bank’s 200 billion-pound ($308 billion) bond-purchase plan “cannot be ruled out,” the group said.
The economy will now grow 2.8 percent in 2012 compared with an April prediction of 3.4 percent, and 2.9 percent the following year compared with the earlier forecast of 3.1 percent, the Item Club said.
The economy extended its recovery from the recession in the second quarter. Gross domestic product rose 1.1 percent, almost four times the 0.3 percent expansion seen in the previous three months and almost double the median forecast of economists in a Bloomberg News survey.
To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net
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