Economic models are tools that can be used to make predictions on the future direction of an economy, based on theory and fuelled with data from current economic performance. The UK Treasury uses a model to make its predictions (the HM Treasury model) and the same model is also employed by an independent think-tank known as the Ernst and Young ITEM Club. ITEM stands for Independent Treasury Economic Model and it has been making forecasts on a quarterly basis since 1988. Frequent revision of growth predictions around the world highlight the weakness of such models in uncertain economic times.
The Item Club, is an independent forecasting group which is sponsored by Ernst and Young, a UK based accounting and financial service giant. According to their website: “ITEM’s forecasts are independent of any political, economic or business bias, providing an impartial benchmark for other private and public economic forecasts. Ernst & Young’s sole sponsorship of the ITEM Club helps meet our clients’ needs for objective economic forecasts in their business planning.”
In its most recent assessment, the Club has warned that if the government’s plan is followed as currently outlined, the nation is likely to see “sluggish growth” for the next two years. The government forecasts growth at 1.2% this year, but the Club suggests that the figure will be lower, just 0.9%. They are calling for stimulus to the economy in the shape of more investment on infrastructure, and support to the housing market. They believe that better growth rates are unlikely to be seen before 2014-15 and require a return of confidence in the business and financial sectors.
The ITEM Club even suggested heresy in questioning the validity of the Bank of England’s 2% inflation target which they styled as “a risk to the credibility” of the bank. This level has proved unattainable for the last 3 years. It praised the Federal Reserve’s recent policy of setting a target level for unemployment (6.5%) as a mechanism to drive the economy forward.