NIESR raises forecast for GDP growth to 1.9%

The UK economy will be back at its trend growth rate by the end of the year despite the stock market turmoil, a leading independent think-tank said yesterday.

The National Institute of Economic and Social Research revised up its forecast for GDP growth this year on the back of a revival in world trade.

But it warned that further drops in share prices combined with a slump in the housing market could trigger an "unpleasant" fall in consumer demand that would tip the UK into recession.

Unveiling its quarterly forecast, which is respected in the financial markets, the NIESR said the economy would grow by 1.9 per cent. This is up from its April forecast of 1.8 per cent and just below the Government prediction of 2.0 to 2.5 per cent.

"This growth rate masks an economy which is expected to grow close at its trend rate over the course of the year," it said, predicting annual growth of 2.5 per cent by year-end.

It said the economic data over the first half of the year – public spending, export demand and household spending – pointed to the need for a rise in interest rates.

The report echoed the Bank of England's warning that household consumption must slow to make way for higher state spending to prevent a rate rise.

But it went on: "As stock markets have weakened, traders believe – probably correctly – that the Bank will be unwilling to raise rates while the market is falling sharply.

"There is a risk that it will find itself in some sort of limbo – reluctant to raise rates while waiting to see the outcome of the market weakness but at the same time presiding over ... unsustainably rapid growth."

The institute predicts rates will start to rise in the final quarter of the year – in line with the City consensus – but rise very gently to reach 5 per cent in two years' time.

The NIESR forecasts assume that the market falls 16 per cent, but believes this will be offset by higher house prices, the fall in the value of the pound and a generally buoyant world economy.

The housing market shows little sign of a slowdown, according to a separate report issued yesterday.

According to a survey of asking prices demanded by sellers, the housing market recovered in July after a small slip in June.

The survey – from the property website rightmove.co.uk – claims to spot changes in the market two months ahead of the mortgage lenders, who said their figures showed prices jumped 20 per cent in June.