The West Midland economy is in good shape to meet the challenges of globalisation despite the collapse the MG Rover, a leading business adviser has claimed.

Ronnie Bowker, manager of Ernst & Young's Birmingham office, was speaking yesterday before the publication of the latest E & Y Item Club economic forecast.

The report itself, however, warns that urgent action is needed to force UK consumers to start saving more money.

According to the Item Club, which bases its predictions on the Treasury's model of the economy, Britain's low savings is affecting the balance of the economy.

The group's spring forecast paints a strong picture of the economy in the short term, with consumer confidence high and economic growth on track for the next year.

It predicts growth of 2.7 per cent this year followed by 2.4 per cent in 2006.

But it warned issues such as savings and the country's pensions deficit would prove a strain in the longer term.

Peter Spencer, chief economic adviser to the Item club, said: "We are simply saving too little as a nation. Our savings culture has all but disappeared and this is affecting the balance of the economy."

Household savings rates had collapsed since 1998 and the occupational pensions system was " seriously degraded", he added.

The report said: "As well as easing the tax burden in the medium term, an increase in savings would help rebalance the economy in the short term." It also repeated warnings that the Chancellor's "golden rule" on the economy was likely to be breached and that tax rises would be necessary at the next Budget as a result. It forecast a budget deficit of £12 billion for 2005-06 against the Chancellor's prediction of £6 billion.

The report highlighted the danger of the UK's weak trade performance, adding: "If the next government ducks these issues, it will be very hard to handle the strain on the tax system in future decades."

Meanwhile, Item continued to believe that any decline in house prices would be modest, with no sign of a serious downturn.

It said it was very hard to see a major weakening in the housing market or the high street against the background of the current stable economy.

Mr Bowker said of the West Midlands: "Despite the extra pressure created by the demise of MG Rover, the regional economy is in good shape to withstand the ongoing challenge of globalisation.

"The shift to precision manufacturing and services is creating a well balanced economy and the Item Club confirms the continuing strong and stable background."

However, the Bank of England's monetary policy committee needs to take the " remaining manufacturers" into account when setting base rate.

"The good news is that the adaptability of the West Midlands, and our achievements to date in transforming the economy, will be the cornerstone of the future - we just need to focus on these vitall issues," Mr Bowker added.