UK ‘will miss growth targets’

Robert Chote, the chair of the Office for Budget Responsibility (OBR), told The Independent newspaper that there “aren’t many people” expecting the UK’s economy to grow by the 1.7 per cent predicted by the Government in March.

The warning from the independent financial watchdog will put pressure on Chancellor George Osborne, who maintains that his strategy of cutting spending to cut the deficit is the only viable option to get the UK economy growing again.

But gross domestic product (GDP) only grew by 0.2 per cent in the second quarter of 2011, continuing a pattern of sluggish growth and adding to fears that the recovery is stagnating. If the growth forecasts for 2011 are revised down later this year, it would be the fourth time they have had to be cut as 2011 fails to deliver on expectations.

Labour seized on the comments, saying Osborne’s strategy was “complacent and out of touch” and warning that borrowing targets could also be affected.

But a Treasury spokesman said: “The economy is growing and creating jobs… The difficult decisions the Government has taken to reduce the deficit is essential for sustainable growth.”

Slower growth

The OBR‘s warning came as other bodies downgraded their growth forecasts for the UK after a turbulent few weeks for the global economy, with the eurozone in crisis and the US narrowly escaping default. The Bank of England held UK interest rates at 0.5 per cent today – the 29th month in a row they have been kept at this level.

In another grim economic portent, the FTSE 100 index fell by 2.3 per cent yesterday – its biggest one-day drop since November last year.

The National Institute of Economic and Social Research yesterday dropped its growth prediction from 1.4 per cent to 1.3 per cent, and Vicky Redwood of Capital Economics told Channel 4 News that her firm’s forecast was closer to 1 per cent.

She said: “They have got 1.7 per cent pencilled in – it looks more likely to be 1 per cent, that’s our forecast for this year. Essentially the recovery seems to have slowed and it suggests the UK is not starting from a very good position to withstand any further shocks it gets.”

Global economic gloom

But if the UK is in a gloomy economic position, it could certainly be worse, economists told Channel 4 News. While growth is not exactly buoyant, the markets – for now – appear to have faith in the Chancellor’s plan, and so does the International Monetary Fund (IMF). This means the country is unlikely to face the kind of economic panic that has recently gripped Greece and then Italy.

This market confidence means the cost of borrowing for the UK Government remains low, while countries like Italy have seen 10-year bond yields leap above 6 per cent.

It’s not what we do that’s terribly important but it’s what the rest of the world does. Professor Mike Wickens

Ms Redwood said: “I think while both the debt and deficit problems in the UK are certainly nothing to be complacent about, because the Government has got a credible plan for dealing with the deficit, the markets have faith for the moment. At least that’s some source of comfort.

“But the measures that take place to reduce the deficit will affect the economy and the recovery will be sluggish for some time.”

Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR) put it more strongly.

“I think Italy is bound to default but I don’t think we are. In the end the commercial decision is: are you going to get your money back? In the UK, yes you will. But from Italy, no you won’t.”

However, now is not the time to be smug about the UK’s relatively stronger position, a consultant to the International Monetary Fund (IMF) told Channel 4 News.

Professor Mike Wickens said: “I think two things are important for the UK. One is, the US is clearly in a very difficult position. The other is the uncertainty caused by the European financial crisis.

“It’s not what we do that’s terribly important but it’s what the rest of the world does. When the UK comes out of recession it’s often when the rest of the world comes out of recession. Right now the rest of the world is struggling.

“There is always far too much emphasis on domestic policy and not enough realisation of the impact of the rest of the world.”