Government budget watchdog slashes growth forecasts to 'weakest in the modern era'

Christopher Furlong/Getty ImagesProtestors dressed as ‘Maybots’ demonstrate at the entrance of Downing Street as cabinet leave following a meeting ahead of the Chancellor’s annual budget on November 22, 2017.
  • OBR cuts growth forecasts for every year up to 2022.
  • Average growth rate for the next five years now set to be 1.4%.

LONDON – The government’s spending watchdog has slashed its growth forecasts for the UK up to 2022, while raising its global growth forecast for this year.

Chancellor Philip Hammond said during his 2017 budget on Wednesday that the Office for Budget Responsibility (OBR) had cut GDP growth forecasts:

  • from 2% to 1.5% this year;
  • from 1.6% to 1.4% in 2018;
  • from 1.7% to 1.3% in 2019;
  • from 1.9% to 1.3% in 2020;
  • and from 2% to 1.5% in 2021.

As suspected, the OBR cut productivity growth forecasts to around 1.1% for the next five years. The spending watchdog blamed the growth cuts on weak productivity.

“The persistence of weak productivity growth does not bode well for the UK’s growth potential in the years ahead,” the OBR said.

The write-downs mean that the UK’s long-term growth rate has now been reduced from 2.5% to 1.4% over the next five years, a crucial period when Britain will be leaving the European Union. The economy will be 2% smaller in 2022 than previously estimated.

Jeremy Cook, chief economist at FX broker WorldFirst, called to OBR’s revisions “swingeing cuts to the UK’s growth forecasts.”

“These represent the weakest expectations on growth over a forecast period in the modern era and probably the largest downgrades since the advent of the Global Financial Crisis,” he said in an email. “In light of growth upgrades in major, key, trading partner countries, these figures are even more disappointing.”

As well as cutting UK forecasts, the OBR raised its estimates for global growth both this year and next by 2 percentage points to 3.6% in 2017 and 3.7% in 2018.

‘Brexit-related uncertainty’

Hammond did not link the growth downgrade to Brexit but did say that the government was setting aside a further £3 billion to cope with Brexit-linked economic challenges.

The OBR explicitly linked the growth downgrate with Brexit, saying the slowing of growth over the next two years would be driven by “public spending cuts and Brexit-related uncertainty weigh[ing] on the economy.”

Michael Metcalfe, global head of macro strategy at State Street Global Markets, said in an email: “The government has committed funds to help with the preparation for Brexit contingency planning, but the real challenge for UK markets revealed in the budget came from the Office for Budget Responsibility (OBR) and the significant downgrades to the UK growth outlook.

“Still high inflation and an expected weakening in growth provide a potentially troubling backdrop for markets even without the political uncertainties created by Brexit.”

The pound dived against the dollar and euro on the back of the cuts to GDP forecasts:

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