OBR raises UK GDP forecast for 2010

The Office for Budget Responsibility (OBR), an independent economic forecasting entity of the British government, raised its UK GDP forecast for this year to 1.8 percent from the previous 1.2 percent estimate.

However, the OBR also reduced its 2011 GDP forecast to 2.1 percent from the prior 2.3 percent expectation; and its economic forecast for the following year to 2.6 percent from 2.8 percent.

Beyond that, OBR is projecting GDP expansion of 2.9 percent in 2013, 2.8 percent in 2014 and 2.7 percent in 2015

“The economy will continue to recover from recession, but at a slower pace than in the recoveries of the 1970s, 1980s and 1990s. OBR stated.

The body also declared that inflation will dip from the current annual rate of 3.2 percent to 1.9 percent by 2012, given the waning impact of the imminent increase in value-added tax VAT.

In addition, the body said that the number of public sector job cuts over the next four years will amount to 330,000, down significantly from 490,000.

Overall, OBR expects UK unemployment will peak next year at 8.1 percent, then decline to just above 6 percent by 2015.

OBR also slightly reduced the expected Public Sector Net Borrowing Requirement from 149 billion pounds in 2010/2011 to 148.5 billion pounds.

Moreover, the OBR indicated that government plans to reduce the deficit, including spending cuts of more than 80-billion pound sterling, would create “sluggish growth” over the medium-term.

The OBR also believes the Government will be able to meet its supplementary target of reducing the
debt-to-GDP ratio by 2015-2016.

Howard Archer, chief UK/European economist at IHS Global Insight in London said the revised figures from OBR do not fundamentally change the outlook for the economy and the public finances, so do not point to any significant change by the government from their current fiscal stance.

“This is essentially a case of tweaking rather than changing the story,” Archer stated.

“As these forecasts will provide the backdrop when George Osborne presents his budget next March, nothing really has changed for the Chancellor. Having said that March still looks some way away in economic terms, especially given all that is going on in the Eurozone.”

Archer also said he thinks the downwardly revised GDP forecasts for 2011 and 2011 “still look on the optimistic side to us.” He projects growth of 1.7 percent in 2011 and 2.2 percent in 2012.

Archer added he is doubtful the British economy can actually grow according to the figures the OBR published for the 2013-2015 period.

Similarly, Vicky Redwood, senior UK economist at Capital Economics in London, said the downgrades to near-term economic growth are hardly a vote of confidence in the Government’s claim that the economy is capable of withstanding the looming fiscal squeeze.

The update by the OBR, Redwood concludes, does nothing to alter the fact that the fiscal squeeze will be the defining influence on the economy over the next few years.