The EY ITEM Club Spring Forecast predicts the UK economy will grow 0.2% in 2023, high inflation will fall in the coming months, and UK house prices will experience a sustained fall in prices.
The EY ITEM Club is a UK-based economic forecasting group founded in 1977 to produce quarterly economic forecasts. It is sponsored by Ernst & Young; hence the EY and the acronym ITEM stands for Independent Treasury Economic Model. Although the forecast has a sponsor, it is said to be independent of any commercial, political or academic bias, which is why HM Treasury uses the UK model for policy analysis and Budget forecasts.
Anyone reading the ITEM Club’s latest forecast, which was released on the 17th of April 2023, will no doubt be filled with optimism for the UK economy, with statements such as the ‘economy is starting to turn a corner’ and predictions the economy will grow and not contract in 2023.
In addition, it forecasts a fall in wholesale energy prices that will push down inflation from the summer onwards, easing the squeeze on households.
One of the first things that stand out in the Spring Forecast is its prediction that the historically high rate of inflation in the UK should fall quickly in the coming months, with cheaper energy having a significant effect.
The Office for National Statistics (ONS) has today revealed Consumer Prices Index (CPI) inflation was down from 10.4% to 10.1%. It was a smaller-than-expected fall, surprising many and could cause the EY ITEM Club to revise its forecast that inflation will fall to just under 3% at the end of 2023.
Another prediction in the Spring Forecast is that the MPC will deliver one more rate increase in May, pushing the interest rate to 4.5%, before rates start to be cut at the end of 2023, with reductions continuing in 2023. However, following today’s news, traders are now expecting the Bank of England interest rate to peak at 5%, according to Bloomberg.
UK House prices to continue falling
The Spring Forecast warns about disruption to the global banking sector, which could lead to tighter lending criteria, which this writer believes is already happening. Moves by certain nations to weaken Western economies are rapidly gaining traction; for example, the creation of alternatives to FIAT currencies and energy price increases could cause significant problems as we move through 2023, leading to stubborn inflation and higher-than-expected interest rates.
The EY ITEM Club’s Forecast for UK House Prices
The EY ITEM Club Spring Forecast predicts house prices will experience a sustained fall, with the next two years seeing a peak-to-trough decline of 10%*.
While the projected fall in prices will likely weigh on construction activity, particularly housebuilding, as well as affecting the sales of household goods, the changing influence of the property market on consumer spending means it is unlikely this fall in values will have a major adverse impact on the economy.
You can read all of the EY ITEM Club’s latest forecasts here.
*The Land Registry February house price index released today showed the rate of increase in average UK house prices had fallen to 5.5% in the 12 months to February, 1% lower than the 6.5% number in January.
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