Economists think growth predictions from the UK’s newly created Office for Budget Responsibility are over optimistic, poll shows

Written by Ray Clancy

Thursday, 17 June 2010 12:17

The British economy will grow steadily over the coming quarters but analysts believe official predictions are still wildly optimistic despite them being cut, a new survey shows.

The latest monthly poll by Reuters of over 40 economists, taken in the past week, predicts UK economic growth of 1.1% this year and 2.1% in 2011, little changed from last month's predictions.

But these are well below the predictions from Britain’s newly created independent budget watchdog, the Office for Budget Responsibility, which downgraded economic growth forecasts on Monday.

The OBR said the country’s economy would grow 2.6% in 2011 as opposed to the previous Labour government’s prediction of growth between 3 and 3.5%, but confirmed earlier expectations for a 1.3% expansion this year.

The UK escaped from its worst recession since the Second World War at the end of last year and while economists see growth of 0.5% per quarter, they gave a one in- our chance that the economy would slip back into recession.

‘Latest evidence remains consistent with a continued gradual recovery in the UK economy, but downside risks have increased in recent months due to the problems in the euro area and more general worries about sovereign debt levels,’ said John Hawksworth at PricewaterhouseCooper.

Following an inconclusive election last month, the Conservative party formed a coalition government with the Liberal Democrats but economists fear the bond between the former political rivals may not be strong enough.

Britain has a record peace time budget deficit to deal with, running close to 11% of gross domestic product, and the coalition is under pressure to reassure markets it will slash borrowing given fears of contagion from the euro zone fiscal crisis.

‘The upside for growth will be constrained by the substantial tightening of fiscal policy that is needed for an extended period to rein in the dismal public finances,’ said Howard Archer at IHS Global Insight.

Asked about the likelihood that Britain would lose its top notch triple A credit rating within the next year, economists gave it a 25% chance.

The median of over 60 forecasters expect the Bank of England to hold rates at their record low of 0.5% until early next year when it would raise them to 0.75%. By June 2011 they are predicted to be at 1% and then raise 50 basis points per quarter to end next year at 2%.

This is in line with a Reuters Bank of England Poll published two weeks ago ahead of June’s Monetary Policy Committee meeting. The poll saw inflation averaging 3.1% this year, well above the central bank’s 2% target, and dropping to 1.9% in 2011. That compares to respective forecasts of 2.7 and 1.7% in last month’s poll.

The poll found economists think unemployment will rise higher than the 7.9% recorded in April, peaking at 8.5%.