UK’s Economic ‘Horror Film Plot’ Posted on July 22nd
5:21pm UK, Monday July 21, 2008
The UK is heading for an economic “horror movie” and will struggle to avoid recession next year, an influential think tank has warned.
Consumer spending is set to stagnate, according to predictions
Economists from Ernst & Young’s ITEM Club predict inflation will remain above the Government’s target for the next 12 months and there will be a “substantial” increase in unemployment.
To add to the misery, the group says lower credit availability and a sharp reversal in the housing market will see consumer spending slow to a near standstill.
ITEM’s chief economist Peter Spencer said: “Both on the high street and in the housing market it is going to get a great deal worse before it gets better.
“We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled.”
Chancellor Alistair Darling
He added: “Consumers will inevitably cut back on non-essential spending in the face of the impact of rising food and energy prices on their discretionary incomes.
“Many parts of the leisure sector will be particularly hard hit.”
ITEM backed the Chancellor’s call for wage restraint in order to keep inflation under control.
The report said: “As with any horror movie, there is an escape route but it is not an easy one.
“It is imperative that wage increases remain restrained, despite the tremendous pressure from food and energy cost inflation.”
The forecast comes after David Blanchflower, who sits on the Monetary Policy Committee, warned recent job losses could be “the tip of the iceberg” and UK house prices could fall by 30%.
Sky News Money Panel member Angela Beech on Blanchflower’s predictions.
In an interview in The Guardian newspaper, he said: “I think we are going into recession and we are probably in one right now.”
He added: “We will probably have three or four quarters of negative growth, but the risks are to the downside.
“It’s not too late to stop it, but we have to act right now. Monetary policy has been far too tight for too long.
“We can’t just sit and do nothing as we have done for too long.”
Sky’s Joel Hills on David Blanchflower’s recession warning.
Mr Blanchflower, who lives in the US, was the sole committee member calling for a cut in interest rates in May and June.
Sky’s business correspondent Joel Hills said: “If his forecasts are true, it would mean this recession, if it is one, would turn out to be worst than the five full-blown post-war recessions that we have seen, the last being in 1991.
“This is all pretty gloomy stuff. However, bear in mind that he has been a lone voice on the panel for some time.
“He has been at odds with the prevailing consensus of the committee, which has been that the big problem isn’t the slowing economy, it’s rising prices.”