The Ernst and Young ITEM Club has been producing economic forecasts for the UK economy for 25 years. ITEM stands for Independent Treasury Economic Model and these days Ernst and Young is commonly known as EY. As the full name suggests, the ITEM club uses the forecasting tool used by the UK Treasury to predict economic growth in the British economy, but it is independent of the government. Originally set up by UK businesses to take advantage of Margaret Thatcher’s policy to make economic data more transparent and readily available to UK business, EY became the sole sponsor of the group 25 years ago.
The most recent EY ITEM Club quarterly report is largely positive on the outlook for the UK economy, but notes that risks could stem from the outcome of May’s general election if it produces a weak government or over the uncertainty an “In/Out” EU referendum would cause should the Conservatives remain in power and honour their pledge to the electorate over the UK’s continued membership of the EU.
The report suggests that full year growth will come in at 2.8%, marginally lower than earlier estimates of 2.9%. It postulates that inflation, measured by the Consumer Price Index, will average 0.1% across the year, but should pick-up to the 1% mark by year’s end. Therefore, the ITEM Club thinks it unlikely that UK interest rates will rise until inflation hits this mark, or moves above it and consequently, they don’t expect a rate rise until next spring. They anticipate that wages will increase by 3.7% in the UK this year and that this will drive consumption higher by 2.8%.
The ITEM Club is Bullish about a strengthening recovery in the Eurozone on the back of improved consumer confidence and the ECB’s QE measures. They also believe that the Eurozone would cope with a Greek default should it prove impossible for the Greeks to come to an agreement with their major creditors before the cash runs out. It seems that only the Tsipras administration thinks that Greece leaving the Euro is a catastrophe that other Eurozone member states would do anything to avoid.