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Risk of a recession 'remains low' Risk of a recession 'remains low'
(about 4 hours later)
The risk of a recession remains low even though UK economic growth will slow sharply in 2008, a report says.The risk of a recession remains low even though UK economic growth will slow sharply in 2008, a report says.
The Ernst & Young ITEM Club, using the Treasury's own model of the economy, expects the economy to expand by 1.8% in 2008 compared with 3.1% last year.The Ernst & Young ITEM Club, using the Treasury's own model of the economy, expects the economy to expand by 1.8% in 2008 compared with 3.1% last year.
It expects interest rates to fall to mitigate the effect of the downturn.It expects interest rates to fall to mitigate the effect of the downturn.
One factor in warding off a recession will be investment from cash-rich government controlled funds in Asia and the Middle East, it said.One factor in warding off a recession will be investment from cash-rich government controlled funds in Asia and the Middle East, it said.
CushionCushion
"We have been living well beyond our means, lured by the offers of cheap no-questions-asked credit," the report said."We have been living well beyond our means, lured by the offers of cheap no-questions-asked credit," the report said.
"The reversal in the credit markets in 2007 could lead to a sharp fall in economic growth, but we believe there is room for interest rates to be cut to cushion this.""The reversal in the credit markets in 2007 could lead to a sharp fall in economic growth, but we believe there is room for interest rates to be cut to cushion this."
Last year's credit crunch emerged as banks tightened up their lending practices when questions arose about the value of some debt - primarily debt linked to high-risk sub-prime mortgages in the United States.Last year's credit crunch emerged as banks tightened up their lending practices when questions arose about the value of some debt - primarily debt linked to high-risk sub-prime mortgages in the United States.
The ITEM club said its forecast for gross domestic product assumed a major reduction in the cost of borrowing.The ITEM club said its forecast for gross domestic product assumed a major reduction in the cost of borrowing.
It expects that the Bank of England will cut interest rates at least three times to around 4.75% from 5.5% currently.It expects that the Bank of England will cut interest rates at least three times to around 4.75% from 5.5% currently.
The projections are included in the ITEM Club's Winter Forecast, which will be published on Monday.The projections are included in the ITEM Club's Winter Forecast, which will be published on Monday.
Wealth fundsWealth funds
Sovereign wealth funds in places like China, Singapore, Dubai and Abu Dhabi would provide relief from the global credit crunch although they would not be a "cure all panacea", the report said.Sovereign wealth funds in places like China, Singapore, Dubai and Abu Dhabi would provide relief from the global credit crunch although they would not be a "cure all panacea", the report said.
"Each week brings more multi-billion dollar investments that are helping many of the financial institutions that have been seriously hit by debt write-offs.""Each week brings more multi-billion dollar investments that are helping many of the financial institutions that have been seriously hit by debt write-offs."
The report also warned that a squeeze on public spending could exacerbate the economic slowdown.The report also warned that a squeeze on public spending could exacerbate the economic slowdown.
Peter Spencer, chief economic adviser to the ITEM club, said the government had left it too late to sort out deteriorating public finances which could make tax cuts to spur the economy tricky to implement. Peter Spencer, chief economic adviser to the ITEM club, said the government had left it too late to sort out deteriorating public finances which could make any tax cuts to spur the economy difficult.
"The Treasury failed to take advantage of years of good growth to put our public finances on a sounder basis, so our ability to respond by easing fiscal policy has been compromised," he said."The Treasury failed to take advantage of years of good growth to put our public finances on a sounder basis, so our ability to respond by easing fiscal policy has been compromised," he said.
"(Prime Minister Gordon) Brown's famous self-imposed "golden rule" was meant to stop us getting into this kind of bind but I'm afraid it will now make matters worse," he added."(Prime Minister Gordon) Brown's famous self-imposed "golden rule" was meant to stop us getting into this kind of bind but I'm afraid it will now make matters worse," he added.