Britain’s economy is likely to grow even more slowly than feared in 2011, with improvements in the trade balance almost the only encouraging element, according to a leading independent research institute.
The National Institute of Economic and Social Research downgraded its January forecast for gross domestic product growth by 0.1 of a point to 1.4 per cent for this year, noting that higher oil prices accounted for some of the weakness.
The lowered estimate came as other new data emerged showing that credit growth and lending to households and businesses remained weak.
Among the figures were the results of a survey for the construction sector for April, which showed activity slowed more sharply than expected, and two new surveys of house prices showing further falls.
Moreover, lending to businesses has fallen further while new mortgage lending remains weak, according to data from the Bank of England.
In setting out its revised forecast for 2011, economists at the NIESR said the rise in oil prices since the start of the year had probably shaved about 0.1 percentage point off its GDP forecast. Even setting that aside, economic activity had been very weak.
“The underlying picture for the UK in the last six months has been poor,” said Simon Kirby, a research fellow. He said Britain’s economy was unlikely to be growing faster than its long-term average – a measure of recovery – until 2013, a far longer period than had been typical following previous recessions.
The single largest contribution to GDP growth is likely to come from net trade, but not because a surge of exports is likely.
Instead, consumption of imports is expected to fall as demand is weakened by the onset of the government’s plan for fiscal consolidation, rising commodities prices and a reduction in the rate at which companies build up inventories.
“It will be the best contribution to GDP from net trade in decades,” Mr Kirby said, noting that it was likely to account for almost all GDP growth this year.
Ray Barrell, senior research fellow at the NIESR, said had it not been for the effects of the planned fiscal tightening, GDP growth this year would be closer to 2 per cent rather than 1.4 per cent. But he noted that plans put forward by the previous government would also have depressed growth, albeit more modestly.
Indeed, the NIESR noted that the reduction in demand from the public and private sectors since the emergence from recession was far greater than that of any other leading economy. The loss of demand from the public sector was particularly notable, it said.
Comparative public sector demand is contracting by roughly 1.2 per cent in the UK compared with 0.4 per cent in the eurozone and 0.3 per cent in the US.
Mr Barrell noted that investor appetite for UK government debt was such that there was no risk of default. He added that such a rapid pace of retrenchment was arguably unnecessary. “I suspect politicians involved are using the desire to reduce borrowings to achieve a slimmer state,” Mr Barrell said. As a result, monetary policymakers were having to keep rates low, possibly for a dangerously long time.
“Fiscal policy is too tight and monetary policy is too loose,” he said.
As a result of fiscal consolidation, rising commodities prices and taxes and future job losses – the unemployment rate is expected to peak at 8.8 per cent this year – consumer spending is expected to fall by 0.6 per cent this year.
The forecast comes against a backdrop of other weak data. The Markit/CIPS survey of purchasing managers in the construction sector for April showed a drop in headline activity to 53.3 from 56.4, showing that although activity is expanding, it is doing so more slowly than previously.
Housebuilding was declining, the survey showed. The Nationwide House Price Index for April showed prices slipped by 0.2 per cent, offsetting some of the previous two months’ gains, while the Land Registry’s index of house prices showed a 1.1 per cent drop in March from February.
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