Britain’s Weak Recovery
The widely respected Item Club’s economic forecasts are always worth keeping an eye one – not least because their model is very similar to the OBR’s and hence provides a good clue as to which way the official forecasts are likely to move.
The latest updates, out today, appear to be good news. Growth is now expected to be 1.1% in 2013, 2.2% in 2014 and 2.6% in 2015.
This compares rather favourably to the current OBR forecasts of 0.6%, 1.8% and 2.3%. In the other words things are likely to turn out better than the current government forecasts assume.
But let’s not get carried away. It has been apparent for several months now that the latest OBR forecasts look to be on the low side (and let’s remember they really are terrible), the question is no longer ‘will they be revised up?’ but ‘will they be revised up enough?’
As I wrote last week, there are many reasons to be cautious about the current recovery – not least because it remains weak by historical and international standards, is not being accompanied by rebalancing and appears to be driven by a falling household savings ratio.
As the Item Club note today:
UK GDP is set to grow by 1.1% this year. This is the same rate as in 2011, but on that occasion the nascent recovery was cut short by the Eurozone crisis, which hit exports and business investment hard. This year’s renewed growth is being driven mainly by consumer spending and the reviving housing market. However, this time around the recovery looks much more sustainable, and should be given legs by a rebound in business investment and exports from 2014. Combined with a continued revival in consumer confidence and spending, these factors will see UK GDP growth accelerate to 2.2% in 2014 and 2.6% in 2015. (My emphasis).
I’m not as confident as the Item Club appear to be that 2014 will be the ‘year of rebalancing’ with the long predicted bout of business investment finally occurring. As the BBC subtly note in their own write up of the new forecasts:
The report gave no specific rationale for why business investment was expected to rebound next year, but noted that a mild recovery in investment in 2011 was snuffed out by the uncertainty generated by the eurozone crisis.
Let’s hope for that investment boom, but I’m not sure we can bank on it. In fact, I suspect the ‘recovery’ in 2014 may look eerily like the current one – unbalanced, underpinned by falling savings and with a house price and consumer led pattern.
Let’s also remember that whilst growth of 2.2% in 2014 and 2.6% in 2015 sounds good – it is still below where the OBR forecast were back in March 2012 – back then Government expected growth of 2.7% and 3.0% in those years.
Even if the Item Club are entirely correct then by 2015 the economy will barely be larger than in 2008, the government will still be borrowing around 4.8% of GDP, unemployment will still be above 6.0% and real wages well below their 2010 level.
This is hardly, even on today’s more optimistic forecasts, a real recovery.
The real worry is that Britain is going further down the path towards being a lower waged, lower productivity economy – a trend highlighted by Anjum Klair today.
Unless we get off this path it will have serious implications for growth and living standards in the future.