By Daniel Hunter
The National Institute for Economic and Social Research has said that the focus on quarterly movements in GDP — particularly given the multitude of special factors that have distorted the statistics this year — detracts from the bigger picture.
Over the past two years GDP has been broadly flat, and the economy is still around 3.3 per cent below its pre-recession peak in January 2008. Overall this year we expect no GDP growth. This is a slightly stronger picture than presented in our July forecast, but little different from our January and April forecasts.
The outlook for the international economy has weakened. This has led us to revise our forecast for UK growth next year down slightly. We now expect the economy to expand by 1.1 per cent per annum, with no contribution from net trade, and somewhat faster the following year. Only in 2015 do we expect economic growth to rise above the UK’s potential rate of 2 per cent per annum.
Risks to the UK economy are dominated by the external environment. Despite the uncertainty about the US ‘fiscal cliff’ and the degree to which emerging markets are slowing, from the UK perspective developments in the Euro Area are most important, both because of trade and financial sector linkages.
The reduction in uncertainty in the Euro Area, following the announcement of the OMT, should — if sustained — provide some support to spending in the UK.
Fiscal consolidation in Europe as a whole (including the UK) has had large negative effects on growth. The UK’s poor growth performance over the past two years owes much to coordinated fiscal contraction, here and in the Euro Area.
Slow growth has in turn made it much more difficult to reduce deficits. We now expect that the cyclically adjusted current budget will be approximately balanced in 2016—17, and in surplus the year after, which will be the new target year post-Autumn Statement. However, public sector net debt as a proportion of GDP will not fall until 2017—18.
The UK labour market remains remarkably resilient in comparison both to previous recessions and to some other countries (for example, the USA). The absence of any drop in labour force participation is particularly welcome.
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