Economists downgrade Chancellor's 'highly optimistic' growth forecast

BRITAIN'S economy will grow by 1.3 per cent next year, compared with the Chancellor's forecast of between 3 and 3.5 per cent, economists predict today.

The forecast, from the Centre for Economic and Business Research (CEBR), has been revised upwards from the 0.8 per cent predicted in January and assumes a Conservative victory in next month's general election.

The consultancy, whose economic commentaries are closely observed, has left its forecast for growth this year at 1.2 per cent, but also raised its 2012 prediction to 1.4 per cent, compared with the 1.1 per cent cited in January's report.

The forecasts follow news yesterday that China had chalked up unexpectedly strong year-on-year growth in the first quarter of 11.9 per cent, prompting renewed calls for tighter policies to prevent the world's third-largest economy from bubbling over.

Recently revised official figures show the UK economy grew by 0.4 per cent in the final quarter of 2009, up from an initial estimate of 0.1 per cent – ending the longest and deepest recession since official records began.

Last week, the National Institute of Economic and Social Research suggested that the UK had avoided a "double-dip" recession in the first three months of 2010, with estimated GDP growth of 0.4 per cent.

Today's United Kingdom Prospects study from CEBR notes: "(Our] new base forecasts incorporate the assumption of a Conservative victory in the 6 May election, taking account of CEBR's traditional assumption of basing its political predictions on the bookmakers' views. Although the forecasts incorporate the key elements from the party manifestos, they also take account of the likely pressure from the bond markets to cut the budget deficit and so assume spending cuts and tax increases that are not in the party manifestos."

Despite its upward revisions since the start of the year, CEBR noted that its forecasts were well short of the "highly optimistic" views for 2011 and beyond released in last month's Budget.

Charles Davis, main author of the report and senior economist at CEBR, said: "The upward revision to growth should not be taken to imply that the pressure is off as far as public finances are concerned. Whoever wins power will have to take tough decisions – in our view at least 35 billion more fiscal action than was assumed in the March Budget."

Economists described the Chinese GDP data yesterday as sturdy and said it could justify a firmer policy stance to nip inflation in the bud.

Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients: "We think, in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating."