The West Midlands economy is slowing this year - but not in a meltdown - and unlikely to experience a recession.
This conclusion from the latest UK Economic Outlook from PricewaterhouseCoopers is tempered by a forecast that the pick-up expected for next year is likely to be very muted with growth in the region improving to 1.8 per cent from 1.6 per cent in 2008, well short of the 2.9 per cent recorded last year.
On that basis, the West Midlands would be lagging a short way behind the wider UK where PwC sees growth slowing to 1.75 per cent this year from 2007's three per cent, then rising to two per cent in 2009 as the effects of recent and future interest rate cuts feed through. "The good news is that the economy is in better condition than in the early 1990s when we experienced our last recession," said David Waller, PwC's Midlands chairman.
"Inflation, interest rates and unemployment are all much lower this time around, which should help avoid the slowdown turning into an outright recession."
He warned, though, that considerable risks do remain and urged businesses in cyclical sectors to stress test their plans against a possible recession, even though PwC does not regard this as the most likely scenario. Mr Waller cited banking construction, property, leisure and travel, media and business services as activities which should draw up plans for an economic emergency.
PwC expects the growth in consumer spending to moderate from three per cent in 2007 to between 1.5 and 1.75 per cent both this year and next, reflecting the dampening effect of real disposable incomes growing more slowly and high household debt.
In its main scenario, it sees inflation rising in the short term, as does the Bank of England. But it is rather more sanguine than the Bank in expecting it to fall back to around the Government's two per cent target next year - although the future path of food and energy prices along with currency movements raise considerable uncertainties.
The Bank is likely to remain cautious about cutting interest rates in the short term as inflation rises further above its target, PwC argues. Nevertheless it expects the Bank's official base rate to stabilise just below five per cent later this year - although the Bank may have to cut it back below four per cent if it sees signs of a recession looming.
Mr Waller sees manufacturing growth droping back to 0.75 per cent this year before picking up to just over one per cent in 2009.
"Growth in the construction sector is also expected to slow in response to the cooling housing market and tighter credit conditions brought about by ongoing financial market instability," he added.
"The full impact of the credit crunch will not be felt for some time, but it is likely to impact bank lending, bond and equity markets, housing and share prices, consumer and business confidence and exports to the US.
"Tighter credit conditions will certainly dampen consumer spending growth."