UK economic growth 'continuing'

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The UK economy remains buoyant and growth will continue in 2007, says the influential Ernst & Young Item Club economic forecasting group.

It puts the continuing health of the economy down to the expansion of the UK labour force, and the ongoing strength of the housing and financial markets.

The Item Club now expects the economy to grow by 2.9% next year, compared to its previous 2.6% forecast.

Yet it warned that further interest rate rises were necessary.

Expansion potential

The Item Club's autumn forecast says the UK workforce has been bolstered by migrant workers and a rise in the number of older and retirement age employees.

If house prices continue to accelerate, interest rates will have to rise further in 2007 Item Club's Peter Spencer

"The UK economy is expanding quicker than many of us anticipated - but it can go faster," said chief economic advisor to the Item Club, Peter Spencer.

"However, interest rates need to be raised again in November to stop credit expansion and asset price inflation spilling over into excessive demand and inflation.

"If house prices continue to accelerate, interest rates will have to rise further in 2007."

Rate rise

The core UK interest rate has been set at 4.75% by the Bank of England since August.

Most analysts expect a 0.25% rise in November.

Chief economist at Investec Securities Philip Shaw has said that such an increase is "firmly on the cards".

Official figures show UK gross domestic product is currently growing by 2.8%.