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Prospects for the UK economy

Prospects for the UK economy

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An overview:

  • The economy will grow by 1.2 per cent this year, and by 1.8 per cent in 2014.
  • Unemployment rate will remain close to 8 per cent both this year and next.
  • Consumer price inflation will remain above 2½ per cent per annum this year but will fall back to 2.3 per cent, on average, next year.
  • Public sector net borrowing will be around £112 billion (7 per cent of GDP) in 2013/14.

As we have argued for some time, the UK economy has been moribund since the second half of 2010. Whether the UK had a 'single-dip' or ‘double-dip’ recession misses this much bigger picture. The latest Office for National Statistics (ONS) estimates suggest the 2008/9 recession was more severe than previously estimated, leaving GDP 1.3 per cent further away from its pre-recession peak.

The general outlook remains one of a gradual gain in economic momentum. We have revised up our GDP forecasts by 0.3 percentage point in both 2013 and 2014, to 1.2 and 1.8 per cent per annum, respectively. The main cause of the improvement in the economic growth outlook is a rise in the prospects for consumer spending growth. This increased contribution from consumer spending is at the expense of household saving, rather than a consequence of rising real disposable incomes.

One potential ‘risk’ to the growth forecast is that these low saving rates are not sustained. But in any case, while consumer spending growth is a necessary component of any recovery in the UK economy, a balanced recovery will require a significant contribution from net trade and gross fixed capital formation. We see relatively little sign of this as yet, with the current account deficit larger than in the decade before the onset of the Great Recession, and business investment volumes, remaining below 2007 levels until after 2017.

An unbalanced recovery driven primarily by consumer spending (especially if accompanied by rising house prices) is worrying from a long-term perspective. Net national saving, having reached a low point of just 0.5 per cent of GDP in 2012, will only recover to about 2.5 per cent of GDP in 2017 – half that of the pre-crisis period. 

The gradual gain in economic momentum is not enough to close the large negative output gap or reduce unemployment significantly. With unemployment high and no evidence of upward pressure on real wages there is still considerable spare capacity. Underemployment measures suggest that there is even more slack in the labour market than the headline unemployment rate suggests. In such an environment an acceleration in demand growth should be possible without stimulating inflationary pressures. As we have r epeatedly argued, policy measures to boost investment, both public and private, would benefit the economy in both the short and long term.

Public sector net borrowing will be around £112.4 billion, 7 per cent of GDP, in 2013–14, little different from the previous two years. It is only in 2017–18 that public sector net debt, as a per cent of GDP, will start to decline.


See also: Jonathan Portes  talks about the outlook for the U.K. economy, fiscal policy and banks.


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If the ONS had not changed the way it adjusted GDP for inflation in 2011 (switching from a figure based on CPI to RPI) we would have entered a recession in 2011 and would still be in it.

Private debt still remains at 440% of GDP which must continue to have a depressive effect on spending. A look at the chart in the 2013 Budget Report suggested that private debt did not change significantly in 2012. I'm still waiting for an economist to tell me what the interest payments on that debt amount to, let alone the principle. How much drag does that scale of debt exert on the UK economy?

With savings down and household spending up do we not conclude that householders are spending their savings on basics rather than investing it. How long can this go on? Similarly do we have any idea of the scale of zombie companies and how long the banks can let them carry on? With real wages continuing to fall and rental housing continuing to increase is there any likelihood of a strong increase in consumer spending?

A linear regression on GDP since 2010 suggests we might just get back to 2007 GDP by 2018. But if we look at the trend growth from 1955 then we are about 12% behind trend now, and will be about 21% behind trend in 2018 (unless growth accelerates, but not even the Pollyannas are predicting that). The long term trend, and the short term trend are still diverging. Don't we need to talk about the huge amount of output potential that is being lost or destroyed? What do I know, but it seems to me that all this talk of "recovery" is entirely misplaced in light of how much ground is still being lost compared to potential.

All the indicators you discuss suggest to me that "recovery", even "unbalanced recovery" are misnomers. Low growth, high inflation, high unemployment, high govt debt, very high private sector debt, decreasing wages, increasing housing costs. It does not add up to a "recovery". We've had one quarter of something approaching long term trend GDP growth after 20 of well below trend growth. One data point does not make a trend. The trend at present is for growth not much above zero, and we wait to see whether the 0.6% is sustainable.

Forecasters have been predicting growth since 2008. Call me cynical but are the models actually able to predict a recession yet? The forecasters generally failed to predict the largest recession in the history of economics.

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