The UK’s economic outlook
The OBR report anticipates that the recovery from the recession will be at a slower pace than in the recoveries of the 1970s, 1980s and 1990s. This is against the acknowledgment that the recovery has, thus far, been stronger than originally forecast.
As with much of the content of the report the OBR acknowledges its likely rate of error in the assumptions and forecasts. For example, this section of the report admits that "there is considerable uncertainty around all the forecast judgments - and around the conclusions that we reach." To reflect this some of the assumptions are accompanied by "fan charts" which show a range of possibilities 10 per cent either side of the forecast. The report then goes into even greater detail discussing the "significant uncertainty" surrounding their forecasts. The reality is that some five months after the June forecasts the OBR admits forecast errors - that is, of course, a fact of life for those who pursue a career in forecasting.
The key report judgements are:
- The trend rate of growth is projected to be 2.35 per cent, falling back to 2.10 per cent from 2014
- CPI inflation falls from 3.2 per cent in 2010 to 1.9 per cent in 2012 and 2 per cent in 2014, and
- As the economy recovers employment rises from 29 million in 2010 to 30.1 million in 2015.
- Unemployment rate is forecast to peak at just over 8 per cent in 2011 before reducing to just over 6 per cent by 2015.
The pace of the recovery
The economy has grown more strongly between the spring and autumn of 2010 than was forecast in June 2010. Currently, the level of GDP is 0.8 per cent above the expected level. One reason for the improvement is that firms are rebuilding stocks to their pre-recession level. Recovery after previous post war recessions has always exceeded 3 per cent, but not this time, and so the cautious nature of the forecasts reflects the reality of a global economy that has been subject to a downturn more serious that any since the Great Depression.
Forecasts for consumer spending have been increased since June - it is expected that this will increase for the remainder of 2010 aided by the spike in consumer spending as consumers bring their expenditure forward before the VAT increase on 4 January 2011 from 17.5% to 20%.
A bounce back in corporate investment is expected in the next few quarters with firm's proceeding with the investment plans they had put on hold before and during the recession. This view is supported by the latest Bank of England's report which contains a dedicated survey on firms' capital expenditure plans. This survey indicates that firms are currently holding above-normal levels of cash and that, on balance, companies intend to reduce cash holding over the next 12 months, in part by increasing investment. This conclusion is also supported by the CBI Industrial Trends survey of investment intentions which has reported a positive net balance since the end of 2009 - this has turned positive more quickly than in previous recoveries.
After the decline in residential development during the recession it is perhaps not surprising that private dwelling investment recorded a surge of over 11 per cent in the second quarter of 2010. However, this growth is not expected to continue in the short term through to 2012.
Growth in some areas of the euro zone has been strong in recent months (Germany grew by 2.3 and 0.7 per cent in the second and third quarters of 2010), but the current uncertainty with regard to sovereign debt means that there is a risk that this will impact countries ability to grow. The reality is that while growth in excess of 4 per cent is forecast in the years leading up to 2015, no one can be certain. There is much talk of exporting, especially to BRIC countries - in the first instance we have to ensure that our exports remain at least at the same levels as 2010 - a situation that might not be as easy as some would hope given the emphasis on cost cutting and debt repayment.
Goods exports are currently 13 per cent higher than a year ago. However, this growth is offset by weaker services performance, which has been broadly flat over the same period. Continued growth is expected in 2011. As noted above many countries are seeking to grow their exports - which assumes that others must increase their exports. As we enter a new financial era it remains to be seen how the cheques and balances of exporting and importing will play out.
With the decline in sterling the report expects firms to switch to more cheaply produced domestic goods.
Autumn Statement 2010
- Developments since the June OBR report
- UK's economic outlook
- Fiscal outlook
- Fiscal objectives
- Corporation Tax Reform