Economy: Global slowdown could hit growth forecasts

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The Independent Online

For a man whose application for the top job in the country is his handling of the economy, there was no incentive for Gordon Brown to change his already optimistic forecasts.

Mr Brown therefore left his projections for GDP growth and its two headline components - manufacturing output and consumer spending - unchanged from his pre-Budget report some four months ago.

To cheers from the Labour backbenches, Mr Brown told the Commons: "This government [is] the only government in British history to be entering the tenth consecutive year of uninterrupted economic growth."

He stuck with his central forecast for growth to recover from 2005's 14-year low of 1.7 per cent to a central point of 2.25 per cent this year.

More important, he refused to budge on his outlook for strong, above-trend growth of 3 per cent both next year and in 2008.

Consumer spending growth rises from 2.25 per cent his year to 2.5 per cent in 2007 and then 2.75 per cent in 2008.

Manufacturing is forecast to emerge from last year's recession to fragile growth of between 0.5 and 1.0 per cent this year, before accelerating to around 2 per cent in the following two years.

Howard Archer, chief UK economist at the analysts Global Insight, said: "The Budget is largely a 'steady as she goes' affairs in macroeconomic terms from a Chancellor with at least one eye on the top job."

The Treasury forecasts are higher than those in the City, where economists this month cut their average growth projections for next year to 2.4 from 2.5 per cent.

However, the Chancellor has received tacit support from the Bank of England which is also looking at growth nudging 3 per cent over the next two years.

In what has become a ritual event, the Chancellor compared his own record with that of the eurozone economy and with the record of the last Conservative government. "This is the tenth successive year we have grown faster than the euro area," the Chancellor said. "In fact we have not only achieved growth in every quarter of every year since 1997, but averaging 2.8 per cent, our growth rate now is significantly higher than the 2.1 per cent average of the period 1979 to 1997."

But independent economists were more concerned with the future than the past. Angus McCrone, senior economic at analysts CEBR, said the Treasury was assuming world economic growth would continue to steam ahead at 4.5 per cent a year for the next three years. "Periods of synchronised economic growth are rare, and should world growth disappoint then the danger is that this will impact on the Treasury's forecasts for GDP and the public finances. "

The Chancellor did, however, change his view on what would be the main drivers of growth, according to the detailed breakdown. Business investment was revised down sharply for 2006 - from 3.25 per cent in the PBR to 1.75 per cent now - with more modest downgrades for subsequent years although to levels still above 4 per cent.

The impact on the economy was offset, however, by upward revisions to both consumption growth and government spending in 2006.

Simon Rubinsohn, chief economist at Gerrard fund managers, said: "Our principal concern regarding the forecasts is the assumption of a sharp upturn in business investment coming through in 2007. Given UK firms' evident reluctance to invest in the current cycle, this does not seem entirely plausible."

The new measures announced in the Budget did little to alter economists' views about growth or interest rates. The measures lead to a mild expansion of £380m this year but then tighten by around £1.1bn over the next two.

The cost of freezing fuel duty for motorists and pouring a bit of money into schools offset a fresh clampdown on tax avoidance wheezes. As the school money runs out and the anti-avoidance vice tightens, the position goes into reverse.

Roger Bootle, chief economic adviser to Deloittes, the accountants, said: "This Budget will have no influence over the course of interest rates - or indeed on anything else."

Given that Mr Brown avoided fiddling with the growth forecasts, he was unable to leave the public finance figures relatively unscathed. He raised his forecasts for net borrowing by just £2bn in the coming fiscal year but offset this with cuts of £1bn in each of the following years.

He added slightly to the current budget surplus - the measure for testing the golden rule - but said he would still meet the rule with 0.1 per cent, or £16bn, over the economic cycle.

* Treasury Budget site

* Chancellor's Statement in full