PracticeConsultingE&Y: UK can weather economic storm

E&Y: UK can weather economic storm

The UK economy will weather the US storm, but only if the Bank of England continues to cut interest rates, according to experts at Ernst & Young's ITEM Club.

The warning from the independent economic forecasting group came as it saw the UK economic growth rate slowing to two percent, below Gordon Brown’s anticipated 2.25 to 2.75 rate.

But overall the forecasters reckoned the UK had weathered recessionary squalls very well.

ITEM predicted that if Alan Greenspan did not manage to talk the US stock market back up, then it would forecast a growth rate in the UK of only one per cent this year and next, and then only if interest rates were cut to three and a half per cent.

Prof Peter Spence, the E&Y ITEM Club’s economic adviser, said: ‘It is not the growth angle that is important but the fact that the Bank of England, unlike Alan Greenspan, is free to cut interest rates in a non-inflationary environment and cut them again if it has to. That is why we think that if the US goes downhill, the UK will not fare so badly.’

‘Interest rate flexibility will insulate us from the worst,’ he added.

But ITEM’s predictions for the rest of Europe were not as rosy.

The report said Europe was exposed to the US shock through international trade, not just through the important US export market, but also through the indirect effects in Asian markets.

Germany, it said, was particularly vulnerable with its trade dependence on the US.

The comments coincide with those of Paul O’Neill, the US Treasury Secretary, who was ‘mystified’ by European claims that they would not be affected by the US downturn.

Speaking ahead of a meeting of European Union finance ministers in Malmo, Sweden, O’Neill said: ‘I’m just mystified by that because it is so inconsistent with the world as I know it, because I think we’re all in this together.’

Links

Copies of the report can be found at www.ey.com/uk

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