Economic Outlooking Good?…

The influential Ernst & Young ITEM Club, which uses the HM Treasury model of the UK economy when compiling its economic forecasting has published its latest forecast report.

In its Autumn forecast, the ITEM Club says the outlook for the high street will continue to improve as inflation falls and employment grows. With mortgages becoming more readily available, the housing market will start to pick up, generating activity in associated businesses.

However, the report also states its belief that the export growth that the UK badly needs will be harder to find, but ITEM expects a recovery next year, saying that there will continue to be good opportunities in emerging markets for those who can identify them, despite slowing rates of growth.

The forecast sees a return to growth in the second half of this year, leaving Gross Domestic Product (GDP) down by 0.2% on the year. Trade performance in the first half of the year is felt to have been deeply disappointing, offsetting the positive effect of falling inflation and rising employment on consumption. GDP is expected to grow by 1.2% next year and 2.4% in 2014 and 2015.

The ITEM Club sees these more hopeful consumer trends being reinforced by a recovery in the mortgage and housing markets next spring.

The report also notes that the move back to balanced growth over the medium term hangs critically upon a recovery in world markets.

We are cautiously watching to see if/when the US politicians will negotiate away from the much talked about “fiscal cliff” by way of a political deal being reached by the end of the year on spending cuts and tax rises.

Even if this is achieved and Euro policymakers do what it takes to save the single currency, it is possible that these markets will most likely be held back by fiscal retrenchment. Prospects for the rapid growth in markets are less bright than they seemed last year.

The ITEM Club expects the fall in government borrowing over the forecast period to be more gradual than the Office for Budget Responsibilty (OBR) anticipates, largely for cyclical reasons. However, the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the next election if the Chancellor is to meet his fiscal targets.

From an investment perspective, the demise or fortune of specifically the UK economy and more widely the European economies, whilst of important interest, provides only part of the whole investment picture. Economic growth and the investment markets do not always correlate that closely.

In fact, it is very often the case that equity market growth can occur separately from economic recovery. Improved company performance and by inference the investment in such performance, can often lead to better economic times.    

Photo Credit: SBG PhotoStock

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