Brussels warns on risk of UK double-dip

Thursday, 10 November 2011
The British economy will stagnate until next summer with a significant risk of a double-dip recession, the European Commission concludes in its latest forecasts which also show the government’s deficit reduction strategy is failing.
In EU-wide forecasts, which assume that financial markets regain their poise and the eurozone sorts out its woes, the outlook for Britain is still very weak, with growth forecasts sharply revised down and a new black hole in the public finances.

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For the EU as a whole, including Britain, “a deep and prolonged recession complemented by continued market turmoil cannot be excluded,” Marco Buti, the head of economic and financial affairs at the Commission, warned in the introduction to the forecasts.
Coming on the day the Bank of England decided to leave monetary policy unchanged, the forecasts for the British economy are no better than those for the eurozone. The Commission expects no more than 0.1 per cent growth a quarter over the next nine months, adding that a contraction, creating a double-dip “cannot be ruled out”.
Slashing its forecast for household consumption, investment and exports, the Commission said: “The slowdown which began at the end of 2010 now looks more like a prolonged soft patch than a simple weather-related blip”.
It predicts 0.7 per cent growth for 2011, 0.6 per cent growth in 2012 and 1.5 per cent growth in 2013. These weak growth rates – which imply rising unemployment and worse public finances – are much lower than the equivalent official forecasts of 1.7 per cent, 2.5 per cent and 2.9 per cent produced by the Office for Budget Responsibility in March.
The figures will come as a blow to George Osborne, chancellor, since they give superficial ammunition to Labour’s critique that “too far too fast” deficit reduction is snuffing out economic growth.
Even more of a concern to the Treasury, however, will be the fiscal forecasts – which the OBR uses to benchmark its own forecasts – showing slow growth to be a persistent feature so deficit reduction will fall short of the chancellor’s plans.
The Commission has cut the amount of slack it believes to be in the economy by 1.5 percentage points of national income, enough the OBR says for it to declare that Mr Osborne has less than a 50:50 chance of meeting his ambition of eliminating the current budget deficit by the time of the next election.
This target is measured after taking account of the economic cycle and the Commission’s pessimism on economic slack means it has revised higher its structural budget deficit forecast for 2011 from 6.5 per cent of national income to 8 per cent in 2011.
That increase in the structural deficit implies Mr Osborne will either need to find £22bn a year more from tax increases or spending cuts immediately or commit to the grind of public spending austerity continuing well after the next election.
The Commission forecast said: “The worsening growth outlook implies clear downward risks to the latest UK official fiscal forecasts published in March”.
The Commission’s conclusions on the likely strength of the public finances come a week after the National Institute of Economic and Social Research forecast the government was set to miss its other fiscal rule – that public debt must be a declining share of national income by 2015-16 – and the International Monetary Fund’s September forecast a persistent £12bn-a-year shortfall in the public finances.
The OBR benchmarks its forecasts – particularly on the degree of slack in the economy – against these other organisations. Unless it makes different forecasting judgments, much more favourable to Mr Osborne, the fiscal watchdog’s next forecasts, due in the Autumn Statement on November 29, are set to be extremely challenging for the chancellor.
By Chris Giles, Economics Editor


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