Wake-up call to 'complacent' City

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The Independent Online

An influential economic forecasting body has revealed that growth in the UK economy will pick up this year - but at the same time warned that the City has become too complacent about the risk of a downturn.

The Ernst & Young Item Club, which uses the Treasury's forecasting models, is predicting growth of 3 per cent in 2007, compared with an estimate of 2.7 per cent last year. This is being driven in large part by a buoyant service sector, with recruitment at its highest level since 1997, fed by a booming City.

But in a report published tomorrow, the Item Club will also warn that "lenders and investors should avoid complacency. Eventually it is possible that a relatively minor shock could cause a major upset."

The Item Club's chief economic adviser, Peter Spencer, said that lending banks and investors, particularly in commercial property and private equity, should not assume that the good times will continue to roll. He warned that it was wrong for the City to expect the Bank of England to automatically cut rates in the event of a downturn.

"We have become too complacent over this low level of risk. People assume that central banks will bail people out with low interest rates as they have done in the past," he said.

However, Mr Spencer also argued that the consumer price index is likely to fall back from 3 per cent in the coming months as petrol prices decline and utility bills plateau. The report will forecast that average wage settlements in January this year will be 4 per cent, compared with 3 per cent the previous year.

Interest rates are likely to stay around the current 5.25 per cent level unless the cost of living and wages rise more than expected.

Rival economists, however, believe that rates could rise further, particularly after figures from the Office for National Statistics last week showed retail sales rose more than twice as fast as expected in December.