ITEM Club: Govt Is 'Muddling Through' Economy

The coalition Government lacks imagination on how to boost growth and stimulate the economy, according to forecasters at the Ernst & Young ITEM Club.

Its latest report found that the UK economy is muddling through on the Government's 'Plan A', with sluggish growth predicted for the next two years unless the Treasury and the Bank of England adopt a more innovative approach to fiscal and monetary policy.

The ITEM Club's Winter Forecast expects UK GDP growth of just 0.9% this year before staging a slow revival to 1.9% in 2014 and 2.5% in 2015.

As a result, it calls for a fresh approach - or, it says, Britain risks falling behind countries such as the US.

Chief economic advisor to the club, Peter Spencer, said: "Innovative policies from the Federal Reserve have helped to put the US economy in a stronger position to withstand tax increases and spending cuts.

"A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth."

He added: "We are hopeful that the Treasury will see the arrival of a new Governor of the Bank of England as an opportunity to review the remit that it gives the MPC (KOSDAQ: 050540.KQ - news) ."

The club said the UK's short-term growth will be driven by improving prospects for the consumer, with falling inflation and rising employment levels boosting disposable incomes and helping to revive the high street.

The club added that the package of infrastructure spending announced in the UK Autumn Statement had the potential to be a real game-changer, but warned that the £5bn investment did not go far enough and that as a result it was a missed opportunity.

It also called for improvements for the UK housing market, as this has the potential to provide a significant boost to the UK economy.

In the 1930s, low interest rates stimulated a boom in house building, which created jobs and boosted related sectors such as construction and retail.

It expects housing transactions to increase to more than one million next year, with house prices set to follow, rising by 2.1% in 2014 and 5% in 2015.

However, providing the Eurozone remains intact and corporate confidence continues to improve, it expects companies to loosen their purse strings gradually, with business investment forecast to increase by 3.1% this year and 8.1% in 2014.