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
ebooksA special investigation by Andy McSmith
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 Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn