Growth Forecasts Revised Down, Osborne Under Increasing Pressure
George Osborne is coming under increasing pressure to spell out his plans to grow Britain's economy, after another influential think-tank predicted extremely sluggish growth in the UK next year.
A report by the Centre for Economic and Business Research has predicted that UK growth will amount to just 0.7% in 2012. This is less than half the amount predicted by a separate report on growth from Ernst & Young's Item Club, which is projecting growth next year of 1.5%.
The CEBR blames the ongoing crisis in the Eurozone for its downward revision for growth prospects, warning that a bank crisis similar to those seen in 2008 is on the cards.
"A Lehmans-style financial crisis in the Eurozone now looks highly likely – triggered by the unsustainable nature of the single currency area in its current form and the failure of European politicians to take decisive action to calm the markets or make the necessary pro-growth reforms at a fast enough rate," the report concludes.
Douglas McWilliams, one of the report’s authors and chief executive of CEBR, accused the previous government of poor fiscal management, but said this gave George Osborne little move for manoeuvre.
“The Government is between a rock and a hard place," he said. "It is left hoping desperately that the Far Eastern economies and falling commodity prices can fuel a world recovery, and that the European economy does not collapse as it deals with its currency and debt crises.
"In normal circumstances I would call for a fiscal boost – but Gordon Brown spent the money that could have been used for a fiscal boost at a time when the economy didn’t need it.”
The CEBR believes the Chancellor will find it difficult to rethink his austerity agenda, partly because it would be "very damaging politically" but also because the markets would be spooked by any change from the current strategy.
The report claims: "This means the onus lies with the Bank of England to prop up growth and prevent a double dip recession over the coming quarters. Interest rates now look set to remain on hold until mid-2013 and more quantitative easing (beyond the £75 billion announced this month) is almost certainly on the cards."
At the weekend The Sunday Times previewed a report by the Ernst & Young Item Club, which revises down its overall predictions for growth in 2011, and Labour seized on a leader article in The New York Times, which described the coalition's austerity agenda as "self-inflicted misery".
The NYT said: "Austerity is a political ideology masquerading as an economic policy. It rests on a myth, impervious to facts, that portrays all government spending as wasteful and harmful, and unnecessary to the recovery. The real world is a lot more complicated. America has no need to repeat Mr. Cameron’s failed experiment."
Rachel Reeves MP, Labour's shadow chief secretary to the Treasury, said: “Rather than waiting six weeks until his autumn statement, George Osborne should have an emergency budget for jobs and growth now. If he does so we will back him, because with every day of inaction that passes living standards are squeezed harder."
The Ernst & Young report predicts growth of only 0.9% this year, down from an earlier projection of 1.5%. It looks to growth in 2012 amounting to 1.5%, higher than the predictions being made by the CEBR.
The Item Club agrees that George Osborne has little room for manoeuvre, but its report does offer some recommendations.
“To help buffer the UK from strengthening headwinds from the Eurozone, the Chancellor needs to look to the tax system and measures that still remain within his control," concludes the Item Club's report. "The housing market is an important driver of the construction industry and consumer spending. Cutting stamp duty, particularly for first time buyers would, in our view, be money well spent."
The Bank of England's recent decision to increase quantitative easing will come under scrutiny this week when monthly inflation figures are published on Tuesday. Exactly how the Bank's Monetary Policy Committee voted on interest rates and QE will be revealed in its minutes, published on Wednesday.