The Treasury’s official forecasting body has dramatically slashed its growth predictions for this year and next, delivering its worst forecast for economic expansion in the watchdog’s history, largely as a result of a collapse in productivity.
Against a backdrop of lacklustre wage growth and sluggish investment, the Office for Budget Responsibility said that it now sees the economy growing by just 1.5 per cent this year and 1.4 per cent next, down from a previous estimate of 2 per cent and 1.6 per cent, respectively.
The OBR sees the growth rate slipping to just 1.3 per cent in 2019, when the UK is due to exit the European Union, and then picking up gradually to 1.5 per cent and 1.6 per cent in 2021 and 2022 respectively.
Back in March, the OBR had said that it expected the economy to grow by 7.5 per cent in the five years coming years. It now expects that figure to be just 5.7 per cent over that period.
Chancellor Philip Hammond, who delivered the latest prognostications as part of the Autumn Budget statement, said that the slashed predictions were largely based on more pessimistic productivity growth forecasts.
Productivity has been an Achilles heel of the UK’s economy since the financial crisis, and on Wednesday the OBR said that while it expects productivity growth to pick up “a little” in future, it will “remain significantly lower than its pre-crisis trend rate throughout the next five years”.
It downgraded its estimate of productivity growth by 0.6 per cent on average for the years to 2022.
The OBR was established in 2010 by then-Chancellor George Osborne to end a system under which the Treasury produced its own economic growth estimates.
The latest predictions are the gloomiest that the body has ever given, and they are also punier than any produced by the Treasury between November 1983 and June 2010.
Economists and investors, however, said on Wednesday that they were largely unsurprised by the downgrade, based on recent measures of economic health, including productivity and wage growth.
“The revisions to the growth forecasts had been well trailed and were in line with our expectations,” economist at global advisory firm Oxford Economics wrote in a note.
“With Brexit yet to be financed, Mr Hammond was today never going to show other EU governments watching unbridled fiscal largesse,” said Neil Williams, chief economist at Hermes Investment Management.
But Garry Young, director of macroeconomic modelling and forecasting, and Amit Kara, head of UK macroeconomic forecasting, at the National Institute of Economic and Social Research said that there was still downside risk – even to the new, glum forecasts.
“The uncertainty around Brexit presents the most important downside near-term risk to the economy, particularly in the event of an exit involving a sudden stop,” they said.
On the flip side, they said, the OBR’s newest outlook could ineed prove too pessimistic if productivity picks up, and employment remains stable, and if a sustained global economic recovery carries the UK with it.
NIESR earlier this month slashed its own forecasts for UK economic growth and it now expects the economy to expand by 1.6 per cent this year and 1.7 per cent next. That’s broadly in-line with projections from the International Monetary Fund.
The Organisation for Economic Co-operation and Development has also pencilled in 1.6 per cent growth this year, but is anticipating a fall to just 1 per cent next year, based on a scenario where the UK fails to ink a trade deal with the EU ahead of Brexit.
The UK economy grew by 0.4 per cent in the third quarter of 2017, according to official data, and while that was stronger than the 0.3 per cent chalked up in the second quarter, it was below the 0.6 per cent growth recorded across the eurozone.
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