Sovereign wealth funds will prop up UK economy, says think-tank

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The Independent Online

A flood of money from sovereign wealth funds will be a big factor in saving the UK from recession, according to Ernst & Young's Item Club.

The economic think-tank says it is relatively optimistic about global and UK economic prospects because of the role that cash from countries such as China, Singapore, Dubai, Qatar and Abu Dhabi is playing in replacing some of the capital destroyed by the credit crunch.

"We've been looking at a liquidity crisis that's turned into a solvency crisis, and now we are concerned that this could turn into an equity crisis," said Professor Peter Spencer, the Item Club's chief economic adviser. "But the sovereign wealth funds have already helped enormously with the credit crisis, and I think they will now help to support the stockmarkets."

Last week saw the governments of Japan, Kuwait, Singapore and South Korea provide $21bn (£11bn) in cash lifelines to the sub-prime debt-ridden investment banks Citigroup and Merrill Lynch. In the UK, where the financial industry forms a core part of the overall economy, Barclays has been able to attract funding from China Development Bank and Singapore's Temasek Holdings.

However, Professor Spencer warned that SWF money would not be a panacea for the credit crunch: "The SWFs may have trillions at their disposal, but are the banks' shareholders (and the US government) going to continue to allow investment on often punishing terms once this phase of the credit crunch passes?"

The Item Club, which bases its forecasts on the Treasury's model of the UK economy, also says the Government must relax monetary policy to cushion the inevitable fall in economic growth this year. However, it says taxes cannot be cut because public finances are in a poor state. It estimates that the UK's GDP growth will slow from 3.1 per cent in 2007 to 1.8 per cent this year, with the base interest rate down to 4.75 per cent by the year end.