Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The near-term support provided by the Government to businesses and households affected by the coronavirus occurs in tandem with the Bank of England cutting interest rates to 0.25% from 0.75% and announcing measures aimed to support bank lending, especially to small businesses. It is clear that the Treasury and the Bank of England want to present a united front to try and bolster business and consumer confidence by taking coordinated decisive action.
“EY ITEM Club has cut its 2020 GDP growth forecast to 0.5% from 1.2%.
“The Office for Budget Responsibility (OBR) has taken an underlying weaker view of the UK economy’s growth potential. Consequently, the OBR has made overall reductions to its GDP growth forecasts for the UK for the next four years despite the support coming from increased government investment.
“The OBR now sees UK potential output at 1.2% in 2020, rising to 1.4% in 2021 and 2022, 1.5% in 2023 and 1.6% in 2024. In its previous forecast made in March 2019, potential output was seen at 1.5% in 2020, edging up to 1.6% in 2021-23. Consequently, potential output growth is now seen averaging 1.4% a year between 2019 and 2023, down from 1.6% in the March 2019 forecast.
“The OBR has cut its GDP growth forecast for 2020 to 1.1% from 1.4% (which does not allow for the potential Coronavirus impact) but raised it to 1.8% (from 1.6%) for 2021. The growth forecasts for 2022 (to 1.5% from 1.6%) and 2023 (to 1.3% from 1.6%) have both been trimmed while growth is seen at 1.4% in 2024.
“These overall downgraded growth forecasts occur despite the boost to growth coming from “the large and sustained” fiscal loosening in the budget that raises output in the near term, with the effect peaking at around 0.5% in early 2022. Specifically, expected GDP growth of 1.8% in 2021 is buoyed by a forecast 10.9% increase in government investment. The previously expected growth of 1.6% in 2021 included a contribution of 2.2% from government investment.
“The OBR has sharply raised expected government borrowing. Public Sector Net Borrowing Excluding Banks (PSNBex) is now forecast to rise from £47.4b (2.1% of GDP) in 2019/20 to £54.8b (2.4% of GDP) in 2020/21 and £66.7b (2.8% of GDP) in 2021/22 before coming down to £61.5b (2.5% of GDP) in 2022/23, £60.2b (2.4% of GDP) in 2023/24 and £57.8b (2.2% of GDP) in 2024/25. Previously it had been seen coming down to £33.5b (1.2% of GDP) in 2023/24.
“Overall, PSNBex is forecast to be £96.3b higher than before over the 4-year period 2020/21 to 2023/24.
“The OBR has taken a more downbeat view of the UK’s underlying growth capability over the next five years, reflecting a downgrading of its expectation for potential productivity growth (which it attributes to repeated weak outturns, subdued business investment and the incorporation of an effect from higher trade barriers). In the near term, this is partly offset by an upward revision to the expected labour participation rate. Further out, the OBR has revised down its forecast of net inward migration due to the new policy regime from 1 January which reduces the employment level.
“It should be noted that the OBR’s forecasts were made before the coronavirus concerns developed – which is likely to weigh down on near-term growth, although it should not have any longer-term repercussions.
“Trying to forecast the near-term outlook for the UK economy is difficult at the moment. It is unclear how deep the impact of the coronavirus will become and how long it will last.”