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UK economy set for 3.5 pct growth in 2000

LONDON: The outlook for the UK economy in 2000 is rosy, with strong growth and below-target inflation, but tightening profit margins could hit investment and jobs 18 months down the line, a report due out on Monday will show.

In the study, Ernst & Young ITEM Club, a research group which says it uses the same economic model as the Treasury, predicts the UK economy will grow at a healthy 3.5 percent this year.

The estimate is well above the 2.5 to 3.0 percent forecast indicated by Chancellor of the Exchequer Gordon Brown in his pre-Budget report last November, but ITEM says it has factored in stronger data for the economy, particularly in the case of exports, and expects the Treasury to do the same.

It also anticipates underlying inflation at just over two percent this year, below the Bank of England's 2.5 percent target.

Yet it warned profits growth would be subdued by a lack of pricing power.

"Companies, especially those in the manufacturing and export sector, will find it difficult to pass higher operational costs caused by wage and commodity price rises on to an increasingly intractable public," ITEM's economic adviser Peter Spencer says in the report.

Comparative shopping through the Internet and government enquiries into financial products, food and car pricing meant consumers could stand firm on prices.

"That's why consumers will win, but at the expense of business," Spencer said.

The other hit to profits growth would come from the strength of the pound -- which Spencer said was not set to wane.

The Club believed there would be tension amongst the Bank of England's Monetary Policy Committee members when it comes to setting interest rates, although it based its forecasts on an expected rate peak of 6.5 percent, compared with the current level of 5.75 percent.

With interest rates at that level, it still expected house price inflation to reach 14 percent this year.-Reuters