The Office for Budget Responsibility (OBR) has downgraded its growth forecasts.
in 2015, GDP grew by 2.2%. The OBR now forecast it will grow by 2% this year, then 2.2% again in 2017, and then 2.1% in each of the three years after that.
Ian Kernohan, economist at Royal London Asset Management, said: “Given the downgrade to nominal GDP since the Autumn Statement in November, and some more recent signs of global economic weakness, it was always likely that the OBR would reduce their GDP growth forecasts. This they have now done, to 2.0% this year, from their previous forecast of 2.4%. This has had a knock on impact on the Chancellor’s room for manoeuvre, despite the cushion of a budget surplus pencilled in for 2019/20 and lower gilt yields.
“Some extra fiscal tightening was therefore likely, with little chance that there would be any money found ‘down the back of the sofa’ this time around. The key issue for us was how large these extra austerity measures would be and when they would be imposed.
“In the event, we appear to have heard a lot more about tax cuts than tax rises, and the surplus pencilled in for 2019/20 was actually increased, which assumes quite a sudden drop in the deficit compared with the previous year. There were also some headline grabbing measures on tax allowances, a new Sugar Levy and Lifetime ISA.
“The devil of the fiscal tightening has been left for the rest of us to find in the detail, however it looks as if the burden of tax rises will fall on the corporate sector towards the end of the forecast period, hence the projected rapid turnaround in the deficit by 2020.
“There should be no significant impact on the BOE’s view of the economy this year. Today’s labour market data suggest that stories about rapid economic slowdown in the UK look somewhat overegged and we believe markets are too sanguine on the likelihood of interest rate rises over the next 12 months.”