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Hope ahead as families lose faith in Chancellor.

Byline: John Duckers Business Editor

Many young people are slowly realising that they may never be able to afford their own home, while many of their parents suddenly see that a comfortable retirement is beyond them, warns the Ernst & Young Item Club today.

And it claims people have lost faith in the magic touch of Chancellor Gordon Brown to turn their fortunes around.

But it offers some hope for the future, seeing growth picking up and further cuts in interest rates.

However consumer spending, which has been bolstering the economy, is set to take a hit.

In its quarterly economic forecast, the Club, the only economic forecasting group to use the Treasury's own model of the UK economy, says that despite all the doom and gloom of the last few months, the economy is fundamentally sound.

However it predicts growth of 2.1 per cent this year and 2.6 per cent in 2004 against Treasury forecasts of 2.5 to three per cent and three to 3.5 per cent respectively - suggesting Mr Brown may have to borrow more than he expects.

Professor Peter Spencer, the Item Club's economic adviser, said: 'The last two years have seen a massive correction in financial markets and corporate boardrooms after the euphoria that overtook them in the run up to the millennium.

'This 'adjustment' leaves the economy in much better shape in the long term, but the cost to household incomes and balance sheets has been enormous.'

He went on: 'Recent news from the High Street may be gloomy, the Chancellor may be about to raise taxes in April, and the uncertainty surrounding the Middle East and oil prices remains a cause of concern.

'However none of this should obscure the fact the UK has had a decade of uninterrupted economic growth and now has permanently low inflation and low interest rates.'

The 'cure', he says, may be almost over for UK plc.

'The recent tight controls on corporate spending including cuts in dividend pay outs and wage freezes, combined with a recent rise in productivity, have meant an improvement in disposable income for companies. This could mean that the green shoots of a revival in business spending will be closer than previously thought.

'Exports from the UK and business investment into the country are poised to at least begin to pick up in 2003.' Underpinning any talk of a recovery is the healthy housing market.

Prof Spencer said: 'We believe that the modest growth we are predicting for the housing market in 2003 will balance the downturn in both consumer and Government contributions that will occur over the next 12 months.'

Likely future cuts in base rates towards the end of the year, perhaps by up to half a per cent, would assist the process.

But it all comes at a personal cost. 'Personal incomes have been under pressure over the last twelve months and housing apart, there are very few of us that enter the New Year in better financial shape than last year,' he noted.

'Nor do people place much faith in the previously 'golden fingered' Chancellor to sort out the mess.

But, believes Prof Spencer, the decline in the US dollar will encourage a more stable American economy. Conversely a stronger euro will open the way for rate cuts that are needed to revive Continental markets.


People are losing faith in Gordon Brown
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Jan 20, 2003
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