The report found the imbalance in the economy between high consumption and low manufacturing output was ‘narrowing’ as exports rallied – it forecasts a favourable acceleration in GDP from 1.7% this year to 2.6% next year.
The Club acknowledged that UK equity markets had suffered from the turmoil in the US markets. While it considered the adjustment in the Dow and dollar to be long overdue, it expects UK markets to find a new balance, at least initially.
The model also forecasts that consumption will slowdown to 3% this year in line with the slowdown in disposable incomes. A further decline is foreseen in 2003 to 2.6% as the effect of higher national insurance contributions and interest rates take their toll.
The ITEM club recognises that UK exports are doing well, particularly to the US (due to the favourable pound: dollar exchange) and expects them to continue to perform, forecasting UK export markets to grow by over 8% in 2003 and similarly in 2004.
This bodes well for the manufacturing sector which should also benefit from the planned recovery in public investment assuming the spending targets set out in Gordon Brown?s Comprehensive Spending Review.
Given the volatility of the world economy and equity markets, the ITEM report considers it unlikely the Monetary Policy Committee will raise interest rates, particularly if underlying inflation remains low.