----by Pan Pylas----
LONDON (AFX) - There were further indications today that the UK economy is in a relatively strong position to avoid recession and that the government can meet its ambitious spending plans to improve public services, economists said. First, the National Institute of Economic and Social Research (NIESR) said the UK economy will grow by 2.3 pct this year and 2.1 pct next, making it the fastest-growing economy among G7 countries. In addition, official data showed that the UK grew by a bigger-than-expected 0.6 pct in the third quarter against expectations of a 0.5 pct rise, largely as a result of a buoyant performance from the service sector. The figures though are preliminary and may be revised next month, economists cautioned. "We are nowhere near recession conditions," said Merrill Lynch economist Mike Taylor.
However, Taylor is forecasting another 25 basis point reduction from the Bank of England next month, taking the key repo rate down to 4.25 pct, especially in light of the global uncertainties. UK consumer confidence figures and US third quarter GDP figures next week should provide further rationale for another rate cut, he said.
The Confederation of British Industry's call earlier this week for a 50 basis point rate reduction is now more unlikely to be met, he added.
NIESR, however, does not think there is any need for further rate cuts, unless the economic conditions worsen further. There have already been six interest rate reductions this year in an effort to stave off recession. Adam Cole, economist at HSBC, thinks NIESR is "overly pessimistic on rates over the near-term" but agrees that the UK economy is looking good for only just below trend growth next year. One reason for the UK's outperformance, according to NIESR, is that the government "is fortuitously administering a major fiscal injection into the economy".
The institute said that with the economy on course to grow solidly through next year, there is no reason to fear that the government's spending plans will prove unsustainable. The government was re-elected with its second landslide in the summer on a promise to improve the nation's public services, particularly health, education and transport. The uncertainties in the global economy since then have increased concerns that the government will have to borrow massively to meet its commitments.
Even if things turn out worse, NIESR notes that the government's 'golden rule' permits a budgetary shortfall during a cyclical downturn, "provided that is offset by a surplus during an earlier upturn". Robert Jukes, economist at Credit Suisse First Boston, said the GDP numbers "provide a strong cushion for growth in the second half...clearly some reassurance for us growth optimists, particularly after the disappointing quarterly CBI survey". Deutsche Bank's Ciaran Barr also noted that the continued strength of GDP growth provides "an important reason why we have not seen a more acute rise in unemployment thus far".
Economists expect the claimant count to start rising next month, however, as substantial job culls from the likes of Marconi PLC and Rolls-Royce PLC start to impact figures. Under the International Labour Organisation measure, unemployment is already rising.