LONDON (AFX) - The UK economy is slowing, with GDP set to rise by only 2.1 pct this year and 2.0 pct in 2002 despite an expected one-point fall in base rates to 6.0 pct within the next 12 months, according to the Independent Treasury Economic Modelling Club sponsored by Ernst and Young.
In its latest quarterly economic forecast, the ITEM Club said the latest indications suggest output grew by about 0.5 pct in the final quarter of 2000 following 0.75 pct in the third and 1.0 pct in the second.
Overall growth is expected to have averaged 3.1 pct in 2000. It said that with monetary and fiscal policy remaining tight, a substantial relaxation of policy will be necessary to keep the economy growing.
But it predicted the Bank of England's monetary policy committee will only cut rates decisively once consumer spending tails off, as is expected over the first half of the year.
"Yet, even with this relaxation, the forecast sees GDP growing by only just over 2 pct in 2001 and 2002," it said.
"As we said in our autumn report, the downside risks resemble those of 1998. However, the U.S. has taken a decided turn for the worse and these risks now look much more threatening."
It said consumption remains strong, but household budgets are stretched, with personal spending to dwindle over the first half of the year as companies limit wage costs and tax bills continue to mount. Personal spending growth will halve over the next two years, it said.
Turning to the labour market, the ITEM Club predicted employment will fall by 200,000 over the next 18 months after peaking at 28 million in the fourth quarter of 2000.
It said that as in 1998 most redundancies will occur in the manufacturing sector. But this time, the service sector will not be strong enough to offset the decline with new jobs, it said. It noted world demand is cooling off rapidly, forecasting the growth in global trade will fall to 6 pct this year from 12 pct in 2000.
The UK will be relatively well placed however to weather a sharp U.S. downturn as its key European markets are still growing, it added.