UK growth expectations rise

1 December 2010

The Office for Budget Responsibility has said that this year's economic growth is expected to rise, but has downgraded its expectations for the next two years.

The UK's economic growth this year is expected to be 1.8% - better than the 1.2% previously expected - according to the latest statement from the Office of Budget Responsibility.

However, its growth estimates for the next two years have been lowered.

The OBR says next year's growth would be 2.1% - down from its previous 2.3% forecast; and 2.6% in 2012, down from its earlier expectation of 2.8%.

Public sector job losses would also be lower than previously thought, with 330,000 people losing their jobs over the next four years rather than the 490,000 it forecast in June.

The OBR also forecast national unemployment would peak at just over 8% in 2011 and then fall steadily to just over 6% by 2015.

There was less positive news for homeowners as the OBR says it expects house prices to fall by 3.1% in 2011, where previously it expected a small rise.

The OBR also says the government's measures to cut the deficit would lead to "sluggish growth" in the medium term, and used the opportunity to emphasise it was entirely independent of the government and had not come under any pressure from ministers.

"The economy will continue to recover from recession, but at a slower pace than in the recoveries of the 1970s, 1980s and 1990s," the OBR says.

Howard Archer, chief UK and European economist for IHS Global Insight, says the OBR forecasts do not fundamentally change the outlook for the economy and the public finances, so do not point to any significant change by the government from their current fiscal stance.

"This is essentially a case of tweaking rather than changing the story. As these forecasts will provide the backdrop when George Osborne presents his budget next March, nothing really has changed for the chancellor. Having said that, March still looks some way away in economic terms, especially given all that is going on in the eurozone!"

Graeme Leach, chief economist at the Institute of Directors, says the OBR's 2011 growth forecast looked optimistic despite the downgrade: "We face very strong headwinds next year.

"Real take home pay faces a sharp squeeze and the savings ratio is already very low. Throw in ongoing problems in the financial system and anaemic money supply growth and our judgement is that the economy will be weaker than expected."

On public sector jobs, he adds: "The really interesting story from the OBR is the slashing in public sector job losses from 490,000 to 330,000. This means that the projected public sector employment losses are almost half those seen in the 1990s.

"The peak-to-trough reduction in public spending in the 1990s was 7.4% of GDP. The comparable reduction now is 7.9% of GDP by 2015-16. So the spending squeeze is on a par with the 1990s but the employment shake-out is far less. This is puzzling even when we allow for a greater burden of the cuts falling on welfare spending this time around."

The OBR's data came ahead of the government's annual Budget statement by Chancellor George Osborne which replaces the Pre-Budget report.

He was expected to respond to the OBR figures and save any tax changes or policy statements for the Budget on 23 March 2011 but took the opportunity to announce a a lower 10% corporate tax rate on profits from newly commercialised patents from April 2013.

He says: "I can tell the House that as a result of this measure, GlaxoSmithKline will today announce a new £500 million investment programme in the UK to manufacture a newly developed respiratory device in Hertfordshire, launch a new £50 million venture capital fund to invest in healthcare research, construct a new facility at the University of Nottingham and build Glaxo's next biopharmaceutical plant in this country."

The Chancellor says 1,000 new jobs will be created in Britain during the lifetime of these projects.

He also launched cross-government Growth Review described as a "determined, forensic examination of how every part of government can do more to remove barriers to growth and support new growth opportunities."

He adds: "We are starting to turn the super-tanker around."

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