AS 2014: Is the OBR being sensible or cautious with GDP forecasts?

Richard Jeffrey 450 Index

The Office of Budget Responsibility’s UK GDP forecasts for 2015 and 2016 are too cautious according to Capital Economics.

In today’s Autumn Statement Chancellor George Osborne revealed the OBR has upgraded its outlook for UK growth in 2014 to 3 per cent, up from the 2.7 per cent forecast in March. However for 2015 it is only predicting growth of 2.4 per cent, dropping to 2.2 per cent in 2016.

Capital Economics’ senior UK economist Samuel Tombs says these forecasts still look too cautious and that its forecast is 3 per cent economic growth in both 2015 and 2016.

However Cazenove Capital Management’s chief investment officer Richard Jeffrey says if the UK economy is to grow at 3 per cent in 2015 and 2016, it would have to be supported by significantly improved productivity growth and growth at this rate would not be sustainable in the long-term.

He says: “The cuts in the OBR’s forecasts for 2016 and beyond suggests they are thinking more realistically about sustainable GDP growth.

“While it is possible for the economy to grow at 3 per cent in short bursts, it cannot do so on a prolonged basis without being supported by rising debt. It would also put pressure on the labour market and very quickly become inflationary.”

Having expanded at an “abnormal” rate of 3 per cent a year for a 15-year period, Jeffrey expects the new trend rate of growth in the UK to hover around 2.25 per cent for an “extended” period of time.

He says: “The 3 per cent rate of the past was too fast, being supported by increased immigration to support the labour force and a large build up of debt. As such it needed to slow and we forecast growth will slow to 2.5 to 2.75 per cent next year before slowing to the ‘new normal’ rate of 2.25 per cent.”

Indeed Capital Economics currently forecasts that in 2017 and 2018 UK economic growth will slow to 2.5 per cent as the Government seeks more balanced economic growth.

The importance of an increase in productivity growth was recognised in the Autumn Statement. It reads: A sustained improvement in productivity growth is critical to delivering the OBR’s forecast for the economy. Abandoning the government’s long-term economic plan and the path of fiscal credibility would represent the most significant risk to the recovery.”