Hammond Puts Brave Face on Weaker UK Growth Forecast (FT)
Last Modified: 02:43 PM, Wed Mar 13, 2019

U.K. Finance Minister Philip Hammond put a brave face on forecasts showing the British economy will grow at its slowest pace since 2019. He told MPs today that growth, a thriving labor market and on-target inflation were "a solid foundation on which to build Britain's future." Meanwhile, the Office for Budget Responsibility cut its outlook for growth this year to a 1.2%, down from the 1.6% expansion in its November predictions. The OBR said the downgrade was largely due to notable weakness in business investment and in trade. Hammond urged MPs to map out a way forward on Brexit. "Leaving with no deal would mean significant disruption in the short and medium term and a smaller, less prosperous economy in the long term," he said, warning of "higher unemployment, lower wages and higher prices in the shops."

Hammond puts brave face on weaker UK growth forecast (FT)

Chancellor hit by sharp slowdown in Britain's economy

Delphine Strauss in London

March 13

Philip Hammond put a brave face on forecasts showing the UK economy will grow at its slowest pace since the post-crisis recession in 2019. He told MPs on Wednesday that growth, a thriving labour market and on-target inflation were "a solid foundation on which to build Britain's future".

 

The independent Office for Budget Responsibility cut its outlook for growth this year to a meagre 1.2 per cent, down from the 1.6 per cent expansion pencilled into its November predictions, to reflect a sharp slowdown at the end of last year that it believes has continued in the first quarter of 2019.

 

The OBR said the downgrade was largely due to notable weakness in business investment - which it expects to fall for a second consecutive year in 2019 as a result of Brexit uncertainty - and in trade, where the post-referendum fall in the pound had done very little to boost output growth.

 

It expects gross domestic product growth to strengthen to 1.4 per cent in 2020 and 1.6 per cent the following year, leaving the level of output at the end of 2021 broadly unchanged from its previous forecast.

 

However, this is simply because the OBR has not changed its assessment of the outlook for the UK's potential growth rate - the speed at which the economy can grow sustainably without inflation running above target.

 

Even this relatively modest recovery in GDP growth hinges on a revival in productivity and on steady wage growth supporting a pick-up in consumer spending. Moreover, it still leaves the UK economy 2.7 per cent smaller in 2020 than was expected before the referendum, the Institute for Fiscal Studies noted.

 

"The significant downgrade to the OBR's forecast for business investment growth is a key concern, as weak investment levels significantly limit the UK's productivity and growth trajectory," said Suren Thiru, chief economist at the British Chambers of Commerce.

 

The OBR underlined that its assessment of potential growth is even more uncertain than usual, because it still has "no meaningful basis" to update the broad-brush assumptions on Brexit that have underpinned its forecasts since the immediate aftermath of the 2016 referendum.

 

So far, it has factored in effects of weaker business investment on productivity, and of lower migration on labour supply. It said these effects could become more significant if the government decides on a stricter post-Brexit migration regime, while as time passed, the effects of increased trade barriers would become "more salient".

 

"Assuming a non-disruptive Brexit, the near-term outlook for the economy looks a little weaker than it did in October, Robert Chote, the OBR's chairman, told reporters, adding that data released since the OBR finalised its outlook looked consistent with its predictions for the first quarter of this year.

 

However, the longer term outlook was "clouded by uncertainty and we will have to see how many of the clouds have lifted by the time we are asked for our next forecast", he added.

 

The OBR said its current forecasts, which include a pick-up in business investment as Brexit uncertainty dissipates, were predicated on "an orderly transition to a new - though as yet undefined - long term relationship". The possibility of a disruptive no-deal Brexit, which would deliver a short term shock and have a bigger longer-term impact on potential output, was clearly the biggest risk to the forecast, Mr Chote said.

 

Mr Hammond drove home this point as he presented the forecasts to parliament, urging MPs to map out a way forward on Brexit.

 

"Leaving with no deal would mean significant disruption in the short and medium term and a smaller, less prosperous economy in the long term," Mr Hammond said, warning of "higher unemployment, lower wages and higher prices in the shops".

 

He added that neither fiscal stimulus nor cuts in interest rates would "avoid the effects of a relatively smaller economy nor the pain of restructuring".

 

However, the chancellor was able to point to a brighter outlook for jobs and living standards, provided the UK avoided a disruptive Brexit.

 

The OBR expects unemployment to remain close to its current level of 4 per cent, with wage growth above 3 per cent in each of the next four years. This means pay will rise faster than inflation, which the OBR expects to remain at or below the Bank of England's 2 per cent target.

 

Mr Hammond said the picture painted by the OBR's forecasts was "a far cry from the eight recessions and mass unemployment" the Labour opposition had predicted.

 

However, the OBR thinks employment growth is now set to slow, with the number of new jobs "more than accounted for by population growth". This, combined with the ongoing freeze on working-age benefits and tax credits, will limit growth in per capita disposable income in 2019 in particular.

 

The OBR is slightly more pessimistic on the short term outlook than other independent forecasters, whose average forecast for GDP growth stands at 1.4 per cent for 2019 and 1.6 per cent for 2020.

 

However, the OBR noted that the UK's performance no longer looked so feeble relative to that of its peers: at the start of last year, it was languishing at the bottom of the G7 growth league table, but with growth now slowing in most major economies, it has climbed back to the middle.

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