British economy at 'dangerous junction': research group

17th October 2011, Comments 0 comments

Britain's economy is at a "dangerous junction" due to the eurozone crisis and the weak world outlook, and the Bank of England must cut rates to boost activity, a respected forecasting group said Monday.

The "UK economy has stalled at a dangerous junction and new measures are needed to put growth back on track", the Ernst & Young ITEM Club said in a statement.

"Uncertainty across the eurozone, which is predicted to grow by 1.6 percent this year, and a slowing world economy, is undermining business confidence and investment decisions, putting the brakes on UK growth."

The Club also slashed its GDP forecasts for the next two years, after recent official data showed that economy had flatlined over the past nine months.

"The UK economy has stalled ... with business investment and exports, the key drivers of the recovery now stuck in neutral," it added.

Gross domestic product (GDP) is now predicted to grow by just 0.9 percent this year and by 1.5 percent in 2012. That compared with the previous predictions for expansion of 1.4 percent and 2.2 percent respectively.

"It's worse than we thought," said Peter Spencer, chief economic advisor to the E&Y ITEM Club.

"The bright spots in our forecast three months ago -- business investment and exports -- have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.

"With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track."

The Bank of England (BoE) had decided earlier this month to inject another £75 billion (86 billion euros, $115 billion) into the stalled economy in a bid to bolster growth and prevent a return to recession.

However, the ITEM Club warned that the extra cash was unlikely to put the recovery back on track.

"ITEM Club warns that the additional £75 billion of asset purchases announced ... earlier this month is unlikely to be the silver bullet to the UK's economic woes," it said.

"Long term gilt rates are already at all-time lows and, given the current uncertainty in the market, asset prices may not respond.

"Even if the extra cash does make it into company coffers, there is little incentive for corporates to rush out and spend whilst the level of demand, from both home and abroad, is so unstable.

"Instead ... the Bank of England should consider using monetary policy to lower interest rates by another 25 basis points."

British interest rates have stood at a record low 0.50 percent since March 2009, as the central bank has sought to strengthen the economy.

Spencer added that a quarter-point rate cut "would provide a boost to borrowers and potentially help to stimulate consumer spending during the difficult months ahead".

© 2011 AFP

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