Strong performances by both the UK and global economies should lead to robust growth over the next two years, a report out today claimed.

The UK economy is in its best shape since the 1990s and is expected to grow by 3.5% this year and 3% in 2005, according to the study by Ernst and Young's Item Club.

But the report also warned that high spending and "unrealistic" taxation would leave little room for manoeuvre for the Chancellor after the general election.

The study showed that the United States and China had driven the world economy through its best quarter since 1988.

Chief economic adviser for the Item Club, Peter Spencer, said: "With a global economy firing on all four cylinders and a UK economy in its best shape since the late 1990s, we can look forward to robust growth in the next two years."

The fact that the Government was due to announce full employment later this year was a "ringing endorsement" for its management of the economy, he said.

However, the group warned of the post-election prospects for the Chancellor due to high levels of public spending.

Ernst & Young claimed that the scale of the public deficit would be an unwelcome inheritance for any of the Chancellor's successors.

Today's study also moved to quash recent fears over a slowdown in the housing market.

A dramatic correction in house prices was thought to be unlikely, given the prosperous economy and relatively low interest rates and unemployment.

But Professor Spencer added: "The next few years will only see a modest increase in property values and individuals banking on house price inflation to pay for their retirement will suffer the same disappointment as those who relied on the equity market bubble of the late 1990s."

The Item Club, sponsored by Ernst and Young, is one of the UK's best-known independent economic forecasting groups.

Monday July 19, 2004