ITEM: Lower pound or face recession
The Bank of England must act to bring down sterling or face a full-blown recession, according to an independent economic think-tank.
In its report, published today, the Ernst & Young ITEM Club said the Bank should intervene in the money markets and sell pounds for euros to bring the exchange rate down.
According to the club, an economic forecasting group that uses the Treasury’s own model of the UK economy, ‘until the pound falls back from its present level, bad trade performance will unhinge the economy and keep GDP growth well below trend’.
ITEM is predicting a GDP growth rate of 1.8% for this year and just 2% in 2002.
It said the strength of the pound and weaknesses in the US market would make it very difficult for the UK to sell profitably to both the US and the eurozone.
Exchange rates could be left to adjust of their own accord, but ITEM feared this could be too slow.
Professor Peter Spencer, the club’s economic adviser, warned: ‘If exchange rates do not adjust, this will lead to a collapse – never mind a fall – in investment spending, with knock-on effects for job prospects and personal income.’
He added: ‘Britain has endured high exchange rates for too long. UK manufacturing is already into a recession, which is spreading to services. It will not be long before this hits consumer confidence.’
In April, the ITEM club said the UK could avoid recession if it continued to cut interest rates.
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E&Y: UK can weather economic storm