Prospects for the UK economy
· The economy will grow by 1.2 per cent this year, and by 1.8 per cent in 2014.
· Unemployment rate will remain close to 8 per cent both this year and next.
· Consumer price inflation will remain above 2½ per cent per annum this year but will fall back to 2.3 per cent, on average, next year.
· Public sector net borrowing will be around £112 billion (7 per cent of GDP) in 2013/14.
As we have argued for some time, the UK economy has been moribund since the second half of 2010. Whether the UK had a 'single-dip' or ‘double-dip’ recession misses this much bigger picture. The latest Office for National Statistics (ONS) estimates suggest the 2008/9 recession was more severe than previously estimated, leaving GDP 1.3 per cent further away from its pre-recession peak.
The general outlook remains one of a gradual gain in economic momentum. We have revised up our GDP forecasts by 0.3 percentage point in both 2013 and 2014, to 1.2 and 1.8 per cent per annum, respectively. The main cause of the improvement in the economic growth outlook is a rise in the prospects for consumer spending growth. This increased contribution from consumer spending is at the expense of household saving, rather than a consequence of rising real disposable incomes.
One potential ‘risk’ to the growth forecast is that these low saving rates are not sustained. But in any case, while consumer spending growth is a necessary component of any recovery in the UK economy, a balanced recovery will require a significant contribution from net trade and gross fixed capital formation. We see relatively little sign of this as yet, with the current account deficit larger than in the decade before the onset of the Great Recession, and business investment volumes, remaining below 2007 levels until after 2017.
An unbalanced recovery driven primarily by consumer spending (especially if accompanied by rising house prices) is worrying from a long-term perspective. Net national saving, having reached a low point of just 0.5 per cent of GDP in 2012, will only recover to about 2.5 per cent of GDP in 2017 – half that of the pre-crisis period.
The gradual gain in economic momentum is not enough to close the large negative output gap or reduce unemployment significantly. With unemployment high and no evidence of upward pressure on real wages there is still considerable spare capacity. Underemployment measures suggest that there is even more slack in the labour market than the headline unemployment rate suggests. In such an environment an acceleration in demand growth should be possible without stimulating inflationary pressures. As we have repeatedly argued, policy measures to boost investment, both public and private, would benefit the economy in both the short and long term.
Public sector net borrowing will be around £112.4 billion, 7 per cent of GDP, in 2013–14, little different from the previous two years. It is only in 2017–18 that public sector net debt, as a per cent of GDP, will start to decline.