Osborne's outlook brightens as growth figures beat forecasts

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The Independent Online

George Osborne, the Chancellor, will tomorrow give a much rosier view of the economy in his Autumn Statement in response to better growth figures due to be presented by the new Office for Budget Responsibility.

According to a special report by Ernst & Young's Item Club, the OBR is likely to revise its forecast for 2010 up to around 1.7 to 1.8 per cent, mainly due to a revival in the economy, fuelled by the renaissance of the construction sector and a big rise in net exports to Europe. This compares with earlier GDP forecasts of 1.3 per cent growth and the Office for National Statistics is also likely to revise its figures upwards when it next reports. Between July and September, the economy grew at a rate of 0.8 per cent – twice the rate expected by the OBR and other analysts.

Item's chief economist, Peter Spencer, said: "There is good news on many fronts and I am cautiously optimistic. The axe is not swinging quite so strongly on public-sector workers .... There will be soft patches ahead when the cuts begin to bite, but we are not heading for a double dip."

The OBR's analysis, the first published by economist Robert Chote, is also likely to reduce its estimate of public-sector job losses following the cuts announced in the Comprehensive Spending Review – from 490,000 to 400,000. This is because the coalition made bigger than expected cuts to welfare benefits, so the number of jobs lost across departments will be fewer.

Financial markets, still jittery over eurozone sovereign debt crisis worries, will be eager to see the OBR's forecast for growth and government borrowing to see to what extent the coalition's deficit-reduction plan is on track. Item predicts that, assuming Ireland is kept under control, bond yields and interest rates will stay low.

Mr Spencer, whose forecasting measures use the same model as the Treasury, added that the strength of British exports, partly because of sterling's fall against the euro, is remarkable, and is led by Germany. "British exporters are swinging on the coat tails of Germany's boom in exports to the Far East .... If Germany does well, countries like Austria and Switzerland do too – and so do we."

UK exports were up 19 per cent in the second quarter, led by strong overseas demand for consumer goods such as Burberry fashion, biscuits, and whisky, but also pharmaceuticals and manufacturing components.

After Mr Osborne presents his Autumn Statement, he will launch the Treasury's joint paper on "growth" with Vince Cable, the Secretary of State for Business, Innovation and Skills. This will set out short and long-term objectives to drive private-sector growth, specifically manufacturing and the creative industries. One source said: "Mr Cable wants to remove as many barriers as possible for the private sector; there will be an action plan on 'in-out' regulation, research and development and planning."