Katherine Smith, +1 781 301 9311
katherine.smith@ihsmarkit.com
It is notable that while the GDP growth forecast for 2017 has been revised up markedly (from 1.4% to 2.0%) and the expected budget deficit for 2016/17 has been cut by £16.4 billion (to £51.7 billion from £69.2 billion), the longer-term picture of the economy is essentially unchanged. The economy is still seen as the same size in 2020 as had been the case in last November’s Autumn Statement while an expected budget deficit of £16.8 billion in 2021/22 is little changed from the previously anticipated £17.2 billion
Economic Forecasts
All the economic forecasts contained in the budget have to be considered in the context that there is massive uncertainty over how the UK’s relationship with the EU will develop over the next few years and what arrangements are eventually reached regarding trade, access to the single market and immigration. The growth forecasts for 2019 and beyond are particularly uncertain given that the UK would be due to leave the EU in April 2019 (assuming Article 50 is triggered by the end of March) and nobody knows what arrangements will be in place by then.
Growth
Reflecting the economy’s extended resilience since last June’s Brexit vote, the OBR sharply raised projected UK GDP growth in 2017 to 2.0% from the 1.4% expected in last November’s Autumn Statement.
Significantly though, this improvement is not seen lasting as the growth projections for 2018 (to 1.6% from 1.7%), 2019 (to 1.7% from 2.1%) and 2020 (to 1.9% from 2.1%) have been trimmed. Growth in 2021 is still seen at 2.0%.
While the economy ended 2016 better than expected, we believe the upgrading of the 2017 GDP growth forecast to 2.0% may be over-optimistic and we also suspect that growth will come in lower than the OBR expects in 2018. In particular, there are mounting signs that consumers are now starting to rein in their spending as their purchasing power is increasingly squeezed by rising inflation. Furthermore, we suspect that inflation will rise more than the OBR forecasts (they see it averaging 2.4% in 2017 and 2.3% in 2018) so the squeeze on consumers will be deeper than they expect.
Consequently, we expect GDP growth to come in around 1.6% in 2017 and we see it slowing to 1.2% in 2018. We see growth picking up to a limited extent in 2019 (t0 1.5%) and 2020 (1.8%).
Fiscal Forecasts
The OBR now sees Public Sector Net Borrowing excluding banks (PSNBex) being £23.8 billion lower during 2016/17 to 2021/22 than it had at November’s Autumn Statement. However, this improvement is largely concentrated in 2016/17 (to the tune of £16.4 billion) due to one-off and timing factors, rather than perceived structural changes. In fact the 2017/18 deficit is seen rising from the expected 2016/17 shortfall and an appreciable shortfall is still seen in 2021/22.
Specifically, PSNBex is now seen coming in at £51.7 billion (2.6% of GDP) in 2016/17 then rising to £58.3 billion (2.9% of GDP ) in 2017/18 before coming down progressively to £40.8 billion (1.9% of GDP) in 2018/19, £21.4 billion (1.0% of GDP) in 2019/20, £20.6 billion (0.9% of GDP) in 2020/21 and £16.8 billion (0.7% of GDP) in 2021/22
In November, the PSNBex had been seen at £68.2 billion (3.6% of GDP) in 2016/17 then coming down to £59.0 billion (2.9% of GDP ) in 2017/18, £46.5 billion (2.2% of GDP) in 2018/19, £21.9 billion (1.0% of GDP) in 2019/20, £20.7 billion (0.9% of GDP) in 2020/21 and £17.2 billion (0.7% of GDP) in 2021/22.
If growth comes in less than the OBR forecasts as we expect, then the Chancellor will be highly likely to miss these fiscal targets . However, he has scope to do so under the fiscal mandate he adopted in the Autumn Statement.