Darling’s economic forecast “unrealistic”
Alistair Darling’s optimistic growth forecast has been slammed as “unrealistic” by leading economists.
Despite having to downgrade his economic forecast for this year, the chancellor was surprisingly upbeat during his Budget report claiming that we will see the return of economic growth in the UK before the end of 2009.
He seemed confident that 'recovery' – a word he used 19 times during his 50 minute long speech - is possible and coming soon. Darling forecast that the economy will shrink by 3.5% during the current year as a whole, but will recover before the end of 2009 resulting in 1.25% growth in 2010 and 3.5% growth from 2011.
But his predictions were in stark contrast with new figures released by the IMF, the world’s leading economic watchdog.
In its forecast, the IMF predicts the UK economy will contract by 4.1% this year, with the downturn expected to continue into next year when the economy will fall by 0.4% - painting a very different picture to Darling’s rosy growth forecast.
Many of the UK’s own leading economist have slammed Darling’s claims that a recovery this year is on the cards.
David Page, economist for Investec Securities, says: “It is disappointing in the extreme that the chancellor is content to present these numbers as if they resemble some sort of return to fiscal sustainability. They clearly do not.”
Page believes that Darling was inspired to give his optimistic forecast by the looming general election next year. “In the past, pre election Budgets have been characterised by a popular giveaway,” he explains. “Such is the current state of the UK’s public finances that the theme now is avoiding a necessary set of tax increases and expenditure cuts.”
Other commentators are at a loss to explain what evidence Darling has that a recovery is possible in 2009. John Hamilton, manager of the Jupiter Corporate Bond Fund, says: "A mere six months ago, in his pre-Budget Report, the chancellor jettisoned adherence to the ‘golden rule' and predicted the economy would contract between 0.75% and 1.25% in 2009 followed by a modest rebound in 2010.
“The 2009 forecast has been revised down to a contraction of 3.5%. His former estimate now looks so wide off the mark as to cast serious doubt over today's optimistic forecast of 1.25% growth next year and 3.5% in 2011.
“Even Pollyanna could be forgiven for being cynical. The country may well have a different chancellor by next summer - so why believe such forecasts today?”
There are also concerns that Darling’s forecast could actually damage the economy further.
The Centre for Economic Business Research (cebr) warns a V-shaped recovery is “unrealistic”, with the economy more likely to stagnate next year and achieve 1.5% growth for the next three.
Ben Read, managing economist at cebr, says: “The least we should have got was a semblance of a plan to sort out the public finances in the medium-term. Instead we got a work of fiction.”
As a result, Read warns that the government’s borrowing forecasts – of £175 billion this year - look “completely shot” and are more likely to hit £190 billion.
“Under current plans, we think there’s no chance that borrowing will halve in five years, and will remain well above £100 billion until 2013,” he adds. “The next chancellor will have a fine mess to sort out.”
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.