The UK economy
Â¥ After contracting by 4.3 per cent this year the economy will grow by 1 per cent in 2010. Â¥ Consumer spending will fall by 3.5 per cent in 2009 and by 1.1 per cent next year. Â¥ Unemployment will peak at almost 3m or 9.3 per cent of the labour force in spring 2011. Â¥ House prices will resume their fall, declining in real terms on an annual basis until mid-2012. Â¥ After running at 12 per cent of GDP in both 2009Ã10 and 2010Ã11, public sector net borrowing will fall only gradually to 7.5 per cent by 2013Ã14. Following the huge 2.4 per cent quarterly decline in the first three months of the year, the biggest for 50 years, the economy will shrink a further 0.4 per cent in the second and stagnate in the third. A recovery will begin in the final quarter of 2009, helped by consumers bringing forward purchases to beat the reversion of VAT from 15 to 17.5 per cent in January. The upswing will be sluggish as GDP expands by 1 per cent in 2010 and 1.8 per cent in 2011. Slack demand will bear down on prices, with consumer-price inflation expected to average 1.3 per cent in 2009 and 2010 while home costs, measured by the GDP deflator, will fall by 0.2 per cent this year and rise by just 0.3 per cent in 2010. The recovery will be weak because consumer spending, housing investment and business capital spending will carry on falling in 2010, though by much less than this year. Private consumption will decline by 1.1 per cent despite rising disposable income as households save more; the saving ratio will rise from 1.7 per cent in 2008 to 6.1 this year and 8.9 in 2010. The further rise in saving next year occurs partly for precautionary reasons as unemployment continues to rise but it also reflects continued falls in housing wealth as house prices resume their decline. This in turn will also bear down on housing investment, which will fall by 8.5 per cent in 2010. Business investment will decline by 2.5 per cent in 2010. Despite these counterforces, they will be overcome by a turnaround in the inventory cycle and greater support from net trade. A rundown in stocks has intensified the recession, contributing 1.2 percentage points out of the total 4.3 per cent decline in GDP this year. But in 2010 the change in inventories will add 1 per cent to GDP. Net trade, which has already been bolstering the economy during the recession, will underpin the recovery, boosting GDP by 0.9 per cent next year and by 1.2 per cent in 2011. Domestic producers of tradable goods will be able to exploit the competitive advantage from the lower pound as world trade recovers. A feeble recovery will do little to improve the public sector finances. Public sector net borowing will fall only to 10.6 per cent of GDP in 2011Ã12, when net public debt is expected to reach 83 per cent of national output. Making matters worse in the longer term, trend growth is now estimated to be 2.3Ã2.4 per cent a year. That makes all the more essential a plan for sterner fiscal retrenchment than the one currently envisaged by the Treasury.
Year of publication: |
2009-07
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Authors: | Barrell, Ray ; Kirby, Simon |
Institutions: | National Institute of Economic and Social Research |
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