| UK economy not in meltdown, says PwC |
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| Thursday, 06 March 2008 | |
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The UK’s economy is unlikely to experience a recession, according PricewaterhouseCoopers. Economic growth is projected to slow from 3 per cent in 2007 to around 1.75 per cent in 2008 due to the impact of reduced credit availability, a weaker housing market and slower global growth. Marginally higher growth of 2 per cent is projected for 2009 as the effects of recent and expected future interest rate cuts feed through. The figures are contained in the latest UK Economic Outlook released by PricewaterhouseCoopers LLP. Considerable downside risk John Hawksworth, head of macroeconomics at the firm, said that the good news was that the economy is in better condition than in the early 1990s when we experienced our last recession. He explained that inflation, interest rates and unemployment are all much lower this time around, which should help avoid the slowdown turning into an outright recession. Hawksworth warned, however, that considerable downside risks remained and said that businesses in cyclical sectors like banking, construction and property, leisure and travel, media and business services needed to stress-test their plans against a possible recession, even though this is not the most likely scenario at present in the Big Four firm’s view. Slow real disposable income growth Consumer spending growth is also expected to moderate significantly from around 3 per cent in 2007 to around 1.5-1.75 per cent in 2008 and 2009. This reflects the dampening effect on of slow real disposable income growth and high household debt levels household discretionary spending power. In the PricewaterhouseCoopers main scenario, CPI inflation is likely to rise in the short term but then fall back to around its 2 per cent target level in 2009, although there are still considerable uncertainties around this relating to the path of food and energy prices and exchange rate movements. Interest rates are assumed in this main scenario to be cut further over the next six months before stabilising at just below 5 per cent. If it looks like a recession might be emerging, however, the report argues that the Monetary Policy Committee (MPC) might need to cut rates to below 4 per cent to head off this possibility. With inflation moving above target, however, the MPC is likely to remain cautious on rate cuts in the short term. The implications of the credit crunch A key uncertainty facing the UK economy at present is how far the effects of the recent credit crunch will spill over from banks and other financial institutions to the rest of the economy. Hawksworth said the full impact of the credit crunch would not be felt for some time. He added that it was likely to impact bank lending, bond and equity markets, housing and share prices, consumer and business confidence and exports to the US and that tighter credit conditions would certainly dampen consumer spending growth. “Of particular concern will be the potential impact on the business and financial services sector, which now accounts for around 28 per cent of UK GDP. We expect growth in this sector to drop sharply in 2008 in response to the credit crunch; when compared to the heady growth of recent years, this may feel like a recession to many firms in the sector,” Hawksworth concluded Related articles
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