Budget 1999: Economic Forecasts - Chancellor stands by upbeat view on growth

GORDON BROWN yesterday reaffirmed the controversial growth forecasts he made in November, predicting that Britain would suffer a mild economic slowdown this year before bouncing back strongly next year.

According to the Chancellor, the UK will grow at between one and 1.5 per cent this year - more than forecast by both the City and the Bank of England - and at between 2.25 and 2.75 per cent next year. In 2001, the economy will expand by as much as 3.25 per cent, he said, considerably faster than its long-term trend rate.

Independent economists were divided over Mr Brown's forecasts. Many argued that the Bank of England's recent string of aggressive interest- rate cuts made it more likely that he would hit his growth targets.

"His forecasts don't seem out of line with reality," said Ian Stewart, UK economist at Merrill Lynch. Others noted that recent signs of economic improvement - such as Monday's news of a rise in manufacturing output - seemed to support Mr Brown's optimism.

Other analysts, however, called the Government's forecasts unrealistic. Even the Treasury's most pessimistic estimate for 1999 growth - one per cent - is almost double the consensus City forecast of 0.6 per cent. It is also at the top end of the Bank of England's expectations. In its last economic forecast in February, the Bank predicted 1999 growth would slow to between 0.5 and one per cent.

Mark Wall of Deutsche Bank, which is among the most pessimistic of City forecasters, said: "He may be selling the public short by offering these figures. To get one per cent growth out of this economy would be miraculous."

Mr Wall believes that growth will stall this year and that the economy will suffer a short recession in the first six months of 1999 before bouncing back in the final quarter of the year.

In common with many other forecasters, the Chancellor believes that net trade will continue to drag down economic growth and that the outlook remains tough for Britain's manufacturers. Yesterday's forecasts contain substantial downward revisions to predictions for both export growth and manufacturing output.

Mr Brown now believes that manufacturing will contract by between minus one and minus 1.5 per cent this year, before recovering in 2000. In November, his range was between minus 0.25 and 0.25 per cent.

Exports are now forecast to grow at between 0.25 and 0.75 per cent, compared with between 2.75 and 3.25 per cent in November. As a result, the UK's current-account deficit is set to soar to pounds 10 billion in 1999, according to this latest forecast. The Government said: "Net trade and hence manufacturing output were weaker than expected in the fourth quarter of 1998."

Michael Saunders, UK economist at Salomon Smith Barney/Citibank, said: "If anything, the risks to export growth are on the downside. We had such a weak performance last year that it seems reasonable for exports to remain soft."

Also in common with other forecasters, the Chancellor believes that recent rises in business inventories present a significant downside risk to growth. The latest Treasury predictions are that the running down of company stocks will knock as much as 0.25 per cent from economic growth both in 1999 and in 2000.

Mr Wall at Deutsche commented: "Most of the growth in the fourth quarter of 1998 came from stocks and investment. We have a stock overhang problem. Companies will have to run down stocks before production can really pick up again."

Where Mr Brown is far more optimistic than almost every other forecaster is in the areas of household consumption, investment and government spending. Substantial upward revisions to his forecasts in all these areas have allowed the Chancellor to reaffirm his aggregate predictions for economic growth, despite the deterioration in both net trade and manufacturing.

On household consumption, the Chancellor is predicting a growth rate of between two and 2.5 per cent this year, compared with the City consensus of 1.5 per cent. On fixed investment, Mr Brown is arguing that the growth rate will be between two and 2.5 per cent this year - more than double the City consensus. Few independent forecasters found themselves able to agree with this.

Mr Saunders at Salomon Smith Barney/Citibank said: "Survey evidence suggests that the overall growth rate of business investment will slow sharply this year and may well turn negative, although the growth rate of government capital expenditure is likely to increase sharply."

On government expenditure, Mr Brown was again more upbeat that independent forecasters, although he, of course, had the benefit of inside knowledge. The Treasury is predicting government spending will grow by three per cent this year and by 2.25 per cent in 2000.

"General government investment is expected to contribute around 0.25 percentage points to gross domestic product growth in each of the next three years," the Treasury said.

There were fewer surprises in the Chancellor's inflation forecast. Mr Brown predicted that the underlying rate of inflation would hit his 2.5 per cent target in both 1999 and 2000, although, as in November, he admitted there was a possibility of inflation undershooting target at some point this year.

The Chancellor told Parliament yesterday: "We took decisive action in 1997 and 1998, and, as a result, inflation is under control."

Analysts predicted that inflation would probably be lower than predicted by the Chancellor, although few were surprised at his forecasts. Had Mr Brown forecast inflation at above or below target, it would have been perceived as implicit criticism of the Bank of England's interest-rate policy.

The consensus City forecast is for underlying inflation to be at 2.2 per cent both at the end of 1999 and at the end of 2000. Some believe inflation could fall as low as 1.5 per cent.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test
Tour de France 2015: Twins Simon and Adam Yates have a mountain to climb during Tour of duty

Twins have a mountain to climb during Tour of duty

Yates brothers will target the steepest sections in bid to win a stage in France
John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy