Prospects for the UK economy

The economy will crawl this year, and subsequent growth in 2011 and 2012 will be below trend, estimated to be 2.25%. The expansion in 2010 will come mainly from a slower pace of destocking, which will contribute 0.8% to GDP growth of just 1%. As inventories start to be replenished in 2011, stockbuilding will account for a further 0.5 points but the main driving force by then will be net trade which will contribute 1.1 points to GDP growth of 2%.

The NIESR also found that, after falling by 3.2% in 2009, consumer spending will rise by just 0.3% this year; growth, at 0.9% will remain subdued in 2011. The overall recovery in GDP in both 2011 and 2012 will be held back by fiscal retrenchment. Cuts in public spending (both consumption and investment) will subtract around 0.75% from GDP growth in each of those years.

Unemployment on the ILO measure reached 2.5 million in the three months to February and the jobless rate increased to 8% of the labour force. Both will rise further as the public sector cuts jobs and businesses look for efficiencies following the record 1.8% fall in productivity in 2009. Unemployment will peak at 2.7 million in 2011, when the jobless rate will reach 8.7%.

The NIESR found that an additional programme of deficit reduction worth 2% of GDP should be undertaken once a sustained recovery is under way. This is required less because of worries about possible debt downgrades and rising risk premia on government borrowing and more to create fiscal headroom to deal with a possible future crisis and to reduce the long-term burden of the national debt. The extra retrenchment would be best undertaken with cuts in spending and increases in taxes of 1% of GDP each.