New measures needed to boost economy says ITEM Cub

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LONDON (ShareCast) - The UK economy will suffer sluggish growth for the next two years unless the Treasury and Bank of England can come up with more innovative ways to boost it, according to a new report.

The Winter Report 2013 from the Ernst & Young Item Club predicts the UK economy will grow by 0.9% this year, less than the government's own 1.2% forecast.

The Item Club, which uses the Treasury's own economic forecasting models to make its predictions, said the economy would 'muddle through' under current plans.

It said the economy would stage a slow revival to 1.9% in 2014 and 2.5% in 2015.

However, the report calls for a new approach to macroeconomic policy to help stimulate investment and growth.

It wants the government to spend more on infrastructure, while doing more to support the housing market.

The package of infrastructure spending announced in the UK Autumn Statement had the potential to be "a real game changer", according to the Club's chief economic advisor, Peter Spencer.

But he added the £5bn investment didn't go far enough and was a missed opportunity.

"There is scope for borrowing to help fund infrastructure investment and the government could certainly do more to encourage housing investment, which is subtracting from GDP when it should be adding to it," he said.

Spencer added that the Bank of England's 2% inflation target had become "a risk to the credibility of the Monetary Policy Committee" and was "long past its sell-by date".

"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) ."

Spencer compared it to the US central bank, the Federal Reserve, which has a target for unemployment as well as inflation.

"Innovative policies from the Federal Reserve have helped to put the US economy in a stronger position to withstand tax increases and spending cuts," he said.

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

According to the report, 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.

Consumer spending is forecast to increase by 1.1% in 2013 and 2.0% in 2014, but the Ernst & Young ITEM Club warned this would not provide the balanced, long-term sustainable growth the UK Treasury was hoping for.

Net trade is expected to make a negligible contribution to growth this year, but should increase to 0.5% of GDP by 2015, as world markets pick up.

The forecast says that business investment levels are unlikely to return to their former peaks until at least 2016.

Although prospects in the world economy remain fragile, the study says the risks have lessened since this time last year but a lack of confidence is creating a "climate of inertia" amongst UK firm.

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

A Treasury spokeswoman said: "This report repeats the Office for Budget Responsibility's assessment, saying that the weak global environment has exerted 'a major drag on the UK economy'.

"Despite the difficult conditions, the economy is healing: the deficit has been cut by a quarter in two years and more people are in work than ever before."

"The government has taken action to support the economy, including through its innovative Funding for Lending Scheme, which the report notes has already provided a significant boost to the mortgage market".