British economy to grow by 2.9 per cent, says Ernst & Young think-tank

The UK economy goes into 2007 in rude health, buoyed by a booming financial services industry and strong business sectors, according to the Ernst & Young Item club. The think tank, which uses the same model of the economy as the Treasury, predicts economic growth of 2.9 per cent this year, ahead of most forecasts.

Peter Spencer, chief economic adviser to the Ernst & Young Item club, said: "Stock exchange and M&A transactions have been steaming ahead, and business investment has picked up in the last 12 months, helped by the buoyant economy and rising profitability."

He drew attention to the positive effect private equity firms are having on the economy. "The post-millennium surge in buy-out activity and de-listings spurred by private equity firms means that a large swathe of UK plc has been pushed into a very different governance and incentive framework, designed to increase effort and efficiency."

Mr Spencer predicted some relief for consumers who felt the pinch this Christmas of record levels of personal tax and high utility prices. He believes that this spring utility bills will fall as the impact of lower raw material prices feeds through, which will coincide with an increase in overall employment and an improvement in pay packets.

The Item club thinks the strong growth in labour supply - thanks to immigration and the return of older workers to the workforce - and falls in oil and commodity values will help to keep a lid on prices. It expects CPI inflation to fall back to the 2 per cent target this year without a further rise in interest rates.