More grim news: Economists predict UK will be back in recession in 2012


 

Economists at Standard Chartered have released their predictions for the state of the British economy in 2012, and they make for grim reading.

Gideon-Osborne-staring-at-the-lightThe bank reports (pdf):

The UK economy is likely to be in recession going into 2012 as the negative impact of fiscal tightening and falling real incomes is compounded by a downturn in demand from the UK‟s largest trading partner, the euro area.

We expect GDP to contract in [the first half of] 2012, before bottoming out and eventually recovering in [the second half of] 2012.

The euro area is expected to experience a 1.5 per cent contraction of its own. However, not every major economy is expected to go into recession. The US is expected to maintain growth of 1.7 per cent, and Australia and New Zealand are predicted 2012 growth of 2.9 and 2.4 per cent respectively.

Although higher than Britain, none of those figures are good. They remain below the long-term trend, and below a comfortable level of growth for advanced economies.

The longer term is better, but not much. Standard Chartered forecast 1.5 per cent growth in 2013 and 2.3 per cent in 2014 – which, if true, will necessitate further cuts in the OBR’s forecasts.

The most recent OBR predictions were 2.1 per cent for 2013 and 2.7 per cent for 2014, and a 0.6 and 0.4 base point cut in growth will certainly harm the chancellor’s attempts to cut the deficit.

For instance, as we reported in September, growth cut the 2010-11 deficit as fast as the cuts:

The consensus at the time was that recovery from a balance sheet recession would be slow. But as we saw last year, left to recover, the economy can defy the consensus, and growth definitely wasn’t slow.

A year ago, even George Osborne was celebrating that GDP was growing at its fastest rate since 1999. The predictions for borrowing for 2010-11 were also frequently downgraded as each quarter of fast growth continued.

Of course that all stopped in the fourth quarter, and now the chancellor’s having a bout of amnesia about how fast growth can go.

The difference between the OBR forecast of 2.5 per cent in 2012 and the Treasury’s collation of independent forecasts, which projected 1.1 per cent growth, was massive when applied to the attempts to cut the deficit.

As Daniel Elton reported:

In his Autumn statement, George Osborne confirmed that the Office for Budget Responsibility (OBR) now projects that the government will borrow more than Alistair Darling was projected to at the time of the last election.

This puts the OBR in line with those independent forecasters collated by HM Treasury this month:

  10/11 11/12 12/13 13/14 14/15
Current Independent Projected (Collated by HM Treasury)   129 117 98 81
2010 OBR projection of Osborne Plan 149 116 89 60 37
2010 OBR projection of Darling Plan 155 127 106 85 71
2011 OBR projection of Osborne Plan   127 120 100 79

With growth predicted as -1.3 per cent, rather than 1.1 per cent, it looks like any attempt to cut the deficit to even near that called for by the Darling plan is likely to be nigh-on impossible. The chancellor ought to start planning for a deficit to be maintained for quite some time.

See also:

OBR confirm Osborne will borrow more than the Darling projectionDaniel Elton, November 29th 2011

Whatever Osborne’s growth forecasts today, the reality is probably worseDaniel Elton, November 29th 2011

Inflation report is bad news for Osborne’s targetsTony Dolphin, October 18th 2011

Cameron’s “failed experiment” leads to yet another economic downgradeAlex Hern, October 17th 2011

Growth cut the 2010-11 deficit as fast as cutsCormac Hollingsworth, September 22nd 2011

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