Growth to undershoot forecasts, says Cazenove

The Monetary Policy Committee’s (MPC) growth forecasts for 2011, and possibly 2012, look too optimistic, according to Richard Jeffrey, the head of strategy and economics at Cazenove Capital Management.

Jeffrey says with households suffering a squeeze on real incomes, Cazenove predicts household spending and wider activity is set to decelerate.

Whereas the MPC predicts GDP in Britain will pick up to about 2.5% in 2011 and 3% in 2012, Jeffrey cannot see the overall economy growing by more than 1.5% in 2011, and he adds “the risks are skewed heavily towards the downside”.

“The MPC’s forecasting record is not great. It has consistently over-estimated growth and under-estimated inflation”

Jeffrey says: “The MPC’s forecasting record is not great. It has consistently over-estimated growth and under-estimated inflation. To be fair, the risks to forecasts are acknowledged; however, markets and commentators naturally focus on the MPC’s ‘central expectation’.

“The MPC’s basic tenet is that while there is space capacity in the system (most evident in higher-than-normal unemployment), domestically generated inflation will be low. This may be true, all other things being equal; and it may well prove true that core inflationary pressure does diminish in 2011. However, we remain very concerned that the quantitative easing that has been undertaken will eventually cause inflation to be persistently higher than target.” (article continues below)

If disposable incomes do decline in real terms, the strategist says household spending will struggle to show anything other than modest growth.

“Add to this a decline in government consumption of slightly over 1% in real terms – this is the Office for Budget Responsibility’s assessment – and it seems probable that final expenditure will be flat, at best,” he says.

With final consumption accounting for 88% of total GDP, Jeffrey says that it stretches credibility to assume the remaining 12% of aggregate demand – which is made up of fixed capital investment, inventories and trade – will generate 2.5% growth.