UK growth forecasts lowered

14 June 2010

Britain's new fiscal watchdog has downgraded the last government's growth estimates - although its figures are more optimistic than many economists had envisaged.

The Office for Budget Responsibility (OBR) says Labour's 2011 forecast of 3.25% was too optimistic and revised it down to 2.6%, with lower figures for the following three years.

However, it left this year's figure of 1.25% alone.

Jonathan Loynes, chief European economist at Capital Economics, said: "The implication is that the OBR has assumed that last year's borrowing undershoot at least partly reflects lasting developments which will not just carry through into later years, but increase over the period."

Howard Archer, chief UK economist at IHS Global Insight says: "The Office for Budget Responsibility's GDP growth forecasts look more realistic and defensible than the ones contained in the Labour government's March budget, although we still suspect they will turn out to be on the high side.

"Although deep recessions are often followed by decent rebounds in growth, the fact is that the UK economy continues to face serious headwinds that are likely to limit the upside for growth for some time to come."

The OBR also cut the trend rate of growth - the rate that the economy can grow long term, without causing inflation to 2.25% from previous assumptions of 2.7%.

Azad Zangana, economist at Schroders says this implies that tax revenues generated through growth will be lower in the future, making the case for a structural overhaul to public finances.

He adds that this could also indicate there is a smaller output gap than previously assumed.

"This means that there is less spare capacity in the economy, and therefore less deflationary pressure. We have held this view for some time and believe that as a result, the Bank of England is likely to raise interest rates this year. The OBR's publication has wedged open the door for this debate to now take place," he says. 

The OBR also predicts that the UK's public deficit will fall despite its expectations for a significantly weaker performance from the economy. It is down to 10.5% of GDP in the 2010-11 financial year, from the 11.1% estimated by Labour.

Meanwhile, public borrowing in the 2010/11 financial year will be £155 billion - lower than the £163 billion predicted at the Budget.

Loynes added: "Contrary to expectations that it would project a much higher path for public borrowing than the previous government predicted, the OBR has actually forecast that borrowing will be a cumulative £22 billion lower between 2010 and 2015 than expected in the March Budget."


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