OBR still betting on booming fixed investment to boost long-run growth

Autumn statement 2012: The OBR is still betting on booming fixed investment to boost long-run growth.

 

The headlines today will be dominated by the downgrade to GDP growth in 2012 and 2013 and the higher than anticipated borrowing costs. But of perhaps greater consequence to the medium term health of the economy are the OBR’s projections of growth for 2014, 2015, 2016 and 2017 and the assumptions underlying those predictions.

The Table below shows the OBR’s latest projections for GDP growth between 2011 and 2012. It shows growth is only expected to rise to 2.0 per cent in 2014, 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017. This compares with 3.0 per cent for growth in 2015 and 2016 predicted in the March budget. This matters because it will determine the level of GDP which in turn affects the deficit and debt (when measured as a share of GDP).

See Table 1.2:


But these predictions look like they have to be revised down if the past is anything to go by. The OBR think what they call ‘fixed investment’ (ie capital investment by businesses, government and households) will rebound from 2.1 per cent in 2013 to 8.1 per cent in 2014 before rising to 8.5 per cent (2015), 8.7 per cent (2016) and 8.7 per cent (2017).

The OBR have tried this trick in every subsequent forecast before being forced to downgrade their projections. As the table below shows, only in March, they thought fixed investment would be 6.2 per cent in 2013 and now say 2.1 per cent. In March 2011 they thought it would be 6.0 per cent in 2012 and 8.8 per cent in 2013. In June 2010, they thought it would be 7.9 per cent in 2012. How wrong can you get?

See Fixed Investment table:

Fixed-investment-table
If their long-term predictions of fixed investment are wrong again it will force them to downgrade growth for 2014 and every subsequent year. Scotia Bank said on Monday the UK’s trend growth was more likely to be 1.25 to 1.5 per cent of GDP. Based on the OBR’s own record this looks far more likely than their current prediction.

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