UK growth forecast looks unrealistic after GDP fall

Economics Editor,Sean O'Grady
Wednesday 27 July 2011 00:00

Official figures forecasting growth in the economy this year are almost certain now to be missed, economists said yesterday.

In the light of GDP growth of just 0.2 per cent in the second quarter, City analysts said that the Office for Budget Responsibility's forecasts that the economy would expand by 1.7 per cent this year are increasingly unrealistic – even if special factors such as the royal wedding are taken into account,

They were also concerned that the Office for National Statistics will not publish a more detailed breakdown of GDP until October, rather than in August, as had been expected. The reason, said the ONS, was because of "major changes" in the way it presents the national accounts.

The delay will mean that the Treasury, the Bank of England and others will have to wait even longer to get a clearer picture of what is happening in the economy. Third-quarter GDP data will also be published in October, but the first quarter, when "special factors" may not have been at work, will be the last one this year, published in late January 2012. The end of 2010 and start of 2011 were distorted by the snows and bounce-back from those effects.

Howard Archer, Global Insight's chief economist, said: "We suspect that the economy will grow by just 1.1 per cent this year. The softness of the economy in the second quarter reinforces our belief that the Bank of England will hold off from raising interest rates until at least mid-2012." The Bank of England's rate-setting Monetary Policy Committee meets next week.

Vicki Pryce, a senior managing director at FTI, said: "We might indeed be at the point where the IMF said we might require a rethink of policies looking ahead. What form can this take?

"There has been considerable talk of selective VAT cuts, reduction in the 50p income tax rate, special help for small and medium-sized enterprises, a new look at capital allowances or even easier monetary policy in the form of further quantitative easing. All these options would stimulate demand in 2012."

If the soft patch does turn more permanent, it implies higher unemployment and public borrowing.

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