December 13, 2013


Filed under: Economic Forecast, UK Economy — drderrick @ 1:00 pm

Ongoing and accelerating economic growth in 2013 has surprised most economists, and forecasts have all been revised up. Overall, the economy is now expected to grow by about 1.4% in 2013. That said, in my view, suggestions in some quarters that “he recovery is now firmly established” are premature. Looking closely at the published statistics, the growth in 2013 can be traced to government programmes to subsidise bank lending, and to the Bank of England policy of maintaining interest rates at “life support” levels. The subsidised bank lending has done little to improve the finances of the small and medium sized businesses it was aimed at, and has instead supported increased mortgage provision. This, together with programmes directly aimed at subsidising house buying, have begun to inflate house prices, with some positive effects for the construction sector, and related business services. Rising house prices have also had a wealth effect on private consumers and current private consumption has also risen, despite falling real incomes. Productive business investment remains very weak, and the external trade balance continues to deteriorate. In short, there are no signs yet of a sustainable recovery of the economy, and the growth that there is remains very vulnerable to the interest rate increases expected by 2015.

In light of the challenges faced by the UK, as well as by other economies around the world, the outlook for the next few years is especially uncertain. Continued high private household debts and an expected start to the normalisation of monetary policy by 2015, contribute great uncertainty to growth forecasts over the coming 3 years. Currently, I expect the economy to continue to grow in 2014 but start slowing by the second half, when it will be growing at about 2.3%, and continue to weaken over the course of the following months.  Of course, it would not be surprising to see some modest growth in some quarters over the course of the next 3 years but, in my view, there is little reason to expect overall annual economic growth to accelerate beyond the middle of 2014.

The median estimate for GDP growth in 2014 of the economists surveyed by the Treasury is +2.3%.  Looking further forward, most published economic forecasts see growth accelerating toward 3% or higher. These outlooks are invariably based on the assumptions that interest rates remain unchanged, that business investment increases dramatically, and that the deteriorating balance of payments deficit becomes a growing surplus – that all the things that need to happen do mysteriously happen. The first of these seems highly unlikely – at least after the election in 2015 – while the latter two are unexplained and simply assumed to happen.

By comparison, my model of the UK macro-economy suggests that UK GDP growth will be 1.4% in 2013;  2.0% in 2014; +1.0% in 2015; and +0.9% in 2016.  Consequently I would argue that planning for slowing overall GDP growth of not more than 4% over the course of the whole of the next 3 years would be prudent.



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