UK economists are sticking to their forecasts of better - but unspectacular - economic growth next year, supported in part by an interest rate cut in the first half, according to a new poll.
The median forecast in the survey of 33 economists put gross domestic product (GDP) growth at 1.7 per cent this year and rising to 2.2 per cent in 2006, unchanged from the last poll a month ago. Growth was only expected to pick up to 2.5 per cent in 2007, seen as close to its long-term trend.
"The economy has gone through a little bit of a dive during the course of this year, and we see it getting back towards trend. But private consumption will remain modest and I think for that reason, the overall figure for the year - 2.2 percent - is nothing to write home about," said Peter Dixon at Commerz-bank in London.
Nineteen of the economists expect that the Bank of England will cut rates at least one more time from the current 4.5 per cent during the course of next year, and many say this will be a reason behind the improved growth.
Lower rates should encourage companies and consumers alike to spend rather than save, pumping more money into the economy. However, the danger is that the extra cash fuels inflation, which has already been bumped up in recent months by the high cost of oil and other raw materials.
The poll showed consumer price (CPI) inflation slipping back below the Bank of England's two per cent target ceiling in the second quarter of next year, from 2.1 per cent in 2005.
In theory, this should give the bank room to cut interest rates. However, eight of the economists in the poll saw rates on hold throughout next year and six forecast a rise.
"We think that earnings growth will begin to pick up, so that should support consumption (and) we are going to see housing market activity underpin consumer spending over the next few months as well," said George Johns at Barclays Capital, who expects the Bank of England to reverse August's 25-basis point cut next May.
Though most economists expect inflation to slow in the next few months, some said this should not prevent a rate hike because the Bank of England targets inflation on a two-year horizon rather than in the near-term.
However, median forecasts pointed to a second rate cut to 4.25 per cent by end-June, with rates then staying on hold for the rest of the year.
End-2006 growth forecasts ranged from 1.7 per cent to 2.9 per cent. But though all expected an improvement on this year's performance, 26 of the economists were more pessimistic than the Bank of England's official estimate of 2.5 per cent.
Strategists said strong exports and rising investment would support growth and balance lacklustre demand from domestic consumers. ..SUPL: