New forecast gloomy on economy prospects

Click to follow
UNEMPLOYMENT will climb to 3 million later this year and remain above that level at least until 1997, according to a forecast based on the Treasury's model of the British economy.

Recovery is already under way in parts of the economy, but national output for 1992 as a whole will still be 0.6 per cent lower than last year, according to the independent Item Club. Item is gloomier than most City and academic economists, many of whom have been revising their forecasts to predict zero growth this year.

But Item's predictions are understood to be in line with some of the more pessimistic analyses carried out during the Treasury's annual June forecasting exercise.

Preliminary conclusions from the exercise were presented to the Chancellor late last week as part of the run-up to the autumn public spending round.

Item believes the impact of the exchange rate mechanism and the burden of consumer and business debt will keep growth subdued. It predicts growth of 1.9 per cent in 1993 and 2.5 per cent in 1994, well below the above-trend growth projected by the Treasury.

This implies that tax revenues will not recover as quickly as the Treasury hoped and that benefit payments will remain high. Item is less confident than the Treasury that public sector finances can be brought back towards balance by the end of the decade.

Inflation is expected to average 4.2 per cent in the fouth quarter of this year and then to be pegged around 3 per cent for the next four years by slow growth.

Item warns that even its gloomy forecast for recovery could prove over-optimistic if the desire to repay debt further weakens consumer spending or if export growth falls.