Economists have questioned Alistair Darling’s economic growth forecasts for 2010 and beyond, saying they seem too good to be true.
The chancellor broadly adhered to the prevailing consensus for this year, predicting a steep contraction.
But economists said forecasts for the 2010-11 tax year and beyond depended on several variables that they had difficulty imagining.
In his pre-Budget report in November, Mr Darling had forecast a contraction in national income of 0.75 per cent to 1.25 per cent. That has now been revised to a contraction of 3.25 per cent to 3.75 per cent for the year, broadly in line with private-sector forecasts.
But the Treasury reckons that economic activity will then bounce back fairly quickly. It forecasts expansion of 1.25 per cent for 2010 – led largely by export growth – and then rising to 3.5 per cent in 2011.
It says government measures designed to address the downturn were bigger and implemented faster than in previous recessions. “Experience of those recoveries points to the possibility that recovery can deliver strong growth rates for a number of years as spare capacity is brought back into productive use,” the Treasury’s Budget document says.
The Bank of England’s own central forecast for 2010 growth in gross domestic product is higher than the Treasury made on Wednesday, although it says the risks are very much to the downside of that projection.
Economists and the International Monetary Fund are sceptical of these forecasts. The IMF issued a new UK forecast on Wednesday, predicting that its economy would shrink by 4.1 per cent this year and 0.4 per cent in 2010.
The fund noted that recessions ignited by financial crises tended to take longer to recover than those stemming from other causes.
“This sort of boom in recovery is unprecedented,” said Peter Spencer, economic adviser to the Ernst & Young Item Club. “I’m trying to figure out what letter on my keyboard would represent the shape of the recovery that the Treasury is predicting,” he said. He noted that projections for the public finances called for GDP growth to bounce back to 3.5 per cent by 2011-12 and stay there for years to come. “I think it looks like a square root,” he said, describing a “V-shaped” recovery that plateaued at the highest level for years into the future.
Alan Clarke, economist at BNP Paribas bank, said his forecasts for GDP growth were about two percentage points below those of the chancellor in 2010 and 2011. “We believe that he remains too optimistic on GDP, particularly in 2010 and 2011,” he said. “In turn this implies that borrowing will need to be revised up yet further.”
The implied fiscal tightening that would be required is likely to weigh on consumer demand. And reliance on export-led growth does not produce the same level of tax receipts as does domestic demand. VAT, for instance, is not collected on exports. This makes it harder for the government to close its yawning finances gap.
Moreover, even after a 25 per cent devaluation of sterling, exports are shrinking. The Bank’s agents’ survey, released on Wednesday, noted that export volumes continued to shrink in the first quarter of this year. “Weakness in world demand had continued to outweigh any impact of sterling’s depreciation – most notably in the automotive sector where the trend of destocking was global,” they said. Thus, demand needs to bounce back internationally for the UK to see the recovery that the Treasury is predicting.
Economists say the government has been too optimistic in its assumptions about how households will shift the balance between savings and consumption. Michael Saunders, a Citi economist, points to a supplementary Budget chart showing that household savings are expected to peak at roughly half the rate seen in the 1990s’ recession.
The destruction of household wealth over the past year, through falling stock and equities markets, is likely to prompt even more savings – and less consumption – than in that recession. “Given what has happened in the past year, it is likely that we are going to go through a period of pent-up demand for savings,” Mr Saunders said.
Much of the expected recovery in consumption depends on the banks’ ability to provide the credit to finance it. And while there are some signs that credit availability is starting to ease, there is little reason to expect recovery in lending to bounce back soon.
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