Better times coming but Britain faces tough 2011

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The Independent Online

The British economy faces two very tough years, but will enjoy sustained growth after that, according to one of the nation's leading economics forecasters.

The Deloitte Economic Review says that, while the recovery "appears to have built up a decent amount of positive momentum", its true test – the severe fiscal squeeze – is yet to come. And it says the Government's fiscal tightening, designed to bring the huge budget deficit under control, could leave the recovery looking "pretty lacklustre" at best over the next year or two. The report, written by the Deloitte economic adviser Roger Bootle, says the "only plan B" that appears to be available to the Government, if job cuts in the public sector derail the recovery, is more quantitative easing – likened to printing money – by the Bank of England.

It also warns that the private sector could struggle to create sufficient jobs to replace those lost in the public sector, not least because significant portions of it will be hit by the public spending squeeze, while exporters are almost as reliant on the debt-ridden economies on the fringes of Europe – Portugal, Ireland, Italy, Greece and Spain, the so-called Piigs – as they are on the US.

"Arguably the most important question is whether the private sector can generate enough jobs to offset the public sector job cuts," Mr Bootle says in his report. "But despite the recent strength of the labour market recovery, this looks unlikely. After all, large swathes of the private sector will be hard hit by cuts in Government spending on procurement."

He adds: "The UK sends almost as many exports to the beleaguered peripheral eurozone countries, or Piigs, as to the US. And the outlook there remains dodgy, to say the least. Concerns about the outlook for the single currency could also put further upward pressure on the pound – eroding one of the UK's key advantages."

While net trade should provide a positive contribution to growth over the next couple of years, even a boost of between 0.5 per cent and 1 per cent of annual GDP – similar to that seen in the early to mid-1990s – "would do little more than fill the hole left by falling consumer and government spending".

Mr Bootle adds: "The upshot is that the recovery does not appear to be on the secure footing required for it to maintain its recent pace for long. I expect GDP growth both this year and next of just 1.5 per cent." But Mr Bootle has a more upbeat conclusion, saying: "None of this diminishes the fact that the UK has turned a corner. And, although a difficult couple of years lie ahead, growth should eventually accelerate.

"Indeed, given the large amount of slack that probably still exists in the economy, growth could reach pretty rapid rates further ahead.

"What is more, this growth will be more soundly based than that seen over the past decade or so. So although the next year or two may be a difficult time, a period of strong and sustainable growth lies beyond it."

Ernst & Young's influential Item Club also warned of a tough year and urged monetary policymakers not to raise interest rates.