Wednesday, April 22, 2009

Dismal Economic Forecasts

So Alistair Darling didn't even try to put a positive spin on the UK economy. But faced with the uncompromising economic data, he didn't really have much alternative.

I guess he could have boasted the UK is no longer the sickest economy in the G20.
  • Germany - forecast of -5.7% Growth for this year
  • Japan - forecast of - 6.2%)
  • UK - forecast of -3.5% (though IMF forecast -4.1%)
Yet, the government's forecasts for 2010 still look overly optimistic. The Treasury predict growth of 1.25% in 2010 and 3.2% in 2011. As we mentioned in - Slow Economic recovery. It is hard to imagine how a quick bounce back could materialise - especially given need to restrain borrowing in future years. Given the state of economy, the IMF's forecast of -0.4% growth in 2010 looks far more realistic.

The problem with over optimistic growth forecasts is that it means government borrowing will probably be higher than the Treasury want to admit as well.

This year borrowing was £90bn, Next year it will soar to £175bn or nearly 12% of GDP (the highest peacetime borrowing requirement ever)

National Debt will rise from 50% now to a peak of 80% in 2013/24 (though some fear national debt could reach 90%)

It is not the highest debt in the world, and we have had worse figures in the past. Nor is there any real alternative to government borrowing. (If the chancellor was seeking to balance the budget at a time such as this, the recession could be devastating.) But, it does represent a very quick deterioration making the governments past 'golden rules' look meaningless. It will also mean future chancellors have many difficult choices, especially with demographic factors placing stress on future borrowing.

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