George Osborne, the Chancellor, is set to receive a pre-Budget gift tomorrow in the form of new data revealing that tghe economy has been performing better than previously thought.
The Office for National Statistics is to publish its second estimate of GDP growth for the first quarter of the year, and is widely expected to raise its initial assessment.
Last month, the ONS disappointed economists and dealt a blow to the election campaign of Gordon Brown, who was fighting on a platform of securing recovery, by reporting that the British economy grew by only 0.2 per cent over the three months to the end of March. Since then, however, economic indicators have suggested that the ONS's first estimate, which is made on the basis of comparatively scant data, may have underplayed the extent to which the economy has been bouncing back from recession.
For example, while the ONS had originally thought that the manufacturing sector grew by 0.7 per cent during the first quarter, subsequent data has suggested that the figure may have been closer to 1.3 per cent.
Improving business investment figures, reported last week, plus further boosts from government spending, are also likely to have helped. While consumer spending has been slower – thanks to a combination of higher VAT and the poor weather seen earlier in the year – the effect may have been overplayed.
The National Institute of Economic and Social Research, the independent think tank, has already indicated that it believes the correct figure for growth in the first quarter could be as high as 0.4 per cent.
Such a revision would be a major boost to Mr Osborne as he continues to frame the emergency Budget he is due to deliver in a month's time. The Chancellor was told last week that government borrowing last year was £7bn lower than had previously been thought – giving him slightly more room for manoeuvre on spending and taxation. Better economic growth would augment that helpfully.
Nevertheless, Mr Osborne will be acutely aware that the existing Treasury forecasts for borrowing are based on optimistic forecasts for economic growth, particularly in 2011. The Office of Budget Responsibility, which the Chancellor has asked former Treasury economist Sir Alan Budd to run, is widely expected to trim these forecasts prior to the Budget.
Howard Archer, chief economist at IHS Global Insight, expects the UK's second-quarter GDP growth to pick up to between 0.5 and 0.6 per cent, quarter-on-quarter, as some of the weather-related loss in activity in the first quarter is clawed back. But he warned that the economy is likely to take a short-term hit from the effects of the Icelandic volcanic ash cloud, and also faces major medium-term challenges.
"Further out, we expect recovery to develop only gradually in the face of still major headwinds including fiscal tightening, the eurozone's problems (which could impact negatively on the UK in a number of ways, most notably through limiting exports) and the pressure on consumers coming from high unemployment, still falling employment, muted wage growth and high debt levels," he said.
Furthermore, growth on these shores could be hit by a renewed downturn in Europe, given that the region is the UK's biggest trading partner. At the weekend, the Spanish government was forced to rescue one of its biggest regional banks: the central bank has taken operational control of Cajasur, which needs an urgent cash injection of €500m.
Fears over Spanish banks have been a key concern hanging over the eurozone and the single currency in recent weeks.
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