The Office for Budget Responsibility’s (OBR’s) GDP growth forecast is based on unsustainable predictions and overlooks a real possibility of a gilt crisis, says one L&G economist.
James Carrick describes the OBR’s 2.75% forecast for between 2014 and 2016 as bearing striking similarities to the 2.5% to 3% estimate generated for 2012 in 2010. This has since been revised down to an estimate that is closer to zero.
This latest forecast depends on both “a magical return to easy credit” and a global boom that does not result in inflation, says Carrick, who labels both presumptions as unlikely.
“We’ve really tried to be optimistic here, although it may not look it from the figures,” says Carrick, estimating that growth will actually prove to be nearer to 1.5% in a best case scenario model.
Should the OBR’s wider prediction of a global GDP growth rate of 5% prove correct, it will inevitably be accompanied by heightened inflationary pressures. The result is a squeeze on spending followed by a rise in rates, which chokes off a recovery, says Carrick.
A drastic improvement in domestic credit conditions looks equally unlikely, with the OBR assuming the 2012’s rate of 70,000 property transactions to reach closer to 115,000 by 2016. (article continues below)
“[The OBR] assumes credit conditions will improve very quickly; quicker than during the mid 90s and almost as quick as they did in the mid 80s,” says Carrick.
The analysis suggests the government will again miss its fiscal target which could in itself generate a gilt crisis. If financial markets lose patience with the government, it could result in a credit downgrade which pushes yields to potentially unsustainable levels, says Carrick.
“The government will be faced with the choice of choosing more austerity or gambling with the gilt and FX markets.”