Budget 2017: Government's economic growth forecasts revised down significantly

 
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UK GDP growth will be weaker than previously expected (Source: Getty)

Government forecasts have been significantly revised down following a belated acknowledgement of the UK's poor productivity performance since the financial crisis.

The British economy will grow by 1.4 per cent in 2018, much lower than previous forecasts of a 1.6 per cent expansion, according to forecasts from the Office for Budget Responsibility (OBR) announced today by chancellor Philip Hammond in the Autumn Budget announcement.

The economy's expansion in 2019 will only be 1.3 per cent, down from previous expectations of 1.7 per cent. The downgrade in 2020 was even larger, from 1.9 per cent to 1.3 per cent.

Read more: Deficit hangs over Hammond: Chancellor facing new £20bn black hole says IFS

Hammond seized on the OBR's prediction that there would be more than 600,000 jobs by the end of the forecast period, but that was not enough to distract from dismal productivity predictions.

"Regrettably, our productivity performance continues to disappoint," Hammond said.

Productivity growth will "remain significantly lower than its pre-crisis trend rate", the OBR said in its economic outlook. On average trend productivity growth will be 0.7 percentage points lower per year, reaching only 1.2 per cent in 2022.

Read more: Budget 2017: Hammond to miss deficit targets after big growth downgrade

Productivity weakness will knock three per cent off the potential size of the economy by 2022, according to the OBR's head, Robert Chote.

Productivity growth averaged 2.1 per cent a year in the pre-crisis period, but has averaged just 0.2 per cent over the past five years. In March that productivity growth was predicted to rise slowly to reach 1.8 per cent annually in 2021.

The productivity downgrade had been widely expected after the OBR last month said it expected to "significantly" reduce its long-term forecasts for rate of efficiency of the UK economy. The OBR had assumed in 16 successive forecasts that productivity would improve to pre-financial crisis levels, but finally accepted it is unlikely to bounce back up a decade on.

Rain Newton-Smith, chief economist at the Confederation of British Industry (CBI), said the productivity downgrades were "disappointing but not suprising". She said: "We're in a period of more challenging conditions for the economy."

However, some of the measures announced by the chancellor might help to "tackle some of those issues that have been holding back the UK economy," she added. An additional £8bn for the national productivity investment fund as well as action on business rates and funding for local transport could help businesses to grow.

Sterling slipped against the US dollar as the growth forecasts were announced, reaching lows of $1.3211, before rising to highs of $1.3282.

The important economics news

The UK economic growth forecast from the Office for Budget Responsibility (OBR) was cut to 1.4 per cent next year, compared to March predictions of 1.6 per cent. Expansion in 2017 is expected to be 1.5 per cent.

GDP growth downgrades were even greater in later years: down to 1.3 per cent in 2019 and 2020 (from a 1.9 per cent prediction in March). The growth rate will then pick up to 1.5 per cent and 1.6 per cent in 2021 and 2022 respectively, the OBR said.

A very weak outlook for productivity growth was the main driver for the economic downgrades. The OBR revised trend productivity growth down by 0.7 percentage points a year. It now rises from 0.9 per cent this year to 1.2 per cent in 2022. This reduces potential output in 2021-22 by three per cent.

The structural deficit will fall to 1.8 per cent of GDP in the 2018/19 fiscal year, and 1.1 per cent by 2022/23 and government debt as a proportion of GDP will also fall in every year.

However, the absolute size of the deficit will be £25.6bn by 2022/23, making eliminating the deficit by 2025 unlikely.

Inflation is predicted to peak this year before falling to the Bank of England’s two per cent target from 2020 onwards.

Growth in business investment was also slashed by more than a percentage point every year until 2020 compared to March forecasts. Investment will increase by 2.3 per cent in 2018, the OBR said.

Unemployment will fall further to 4.3 per cent in 2018, before rising to 4.6 per cent in 2022.

Read more: Office for Budget Responsibility to slash productivity growth forecast

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