Office for Budget Responsibility says economy will grow by 0.6% this year, down from 1.2% growth it predicted three months ago
The government's preferred economic forecaster has slashed its growth expectations for the UK in half, blaming a weaker outlook for exports, consumer spending and business investment.
The Office for Budget Responsibility (OBR) said the UK would grow by just 0.6% this year, down from the 1.2% growth it predicted just three months ago. Both figures are a long way from its exuberant projections back in June 2010 that the UK would record 2.9% growth this year.
The UK could narrowly avoid sliding into a triple-dip recession this quarter, it said, if the economy ekes out an expected 0.1% growth in the first quarter – although the OBR said there was still a 50% chance the economy would contract in the first three months of the year. That follows a 0.3% decline in the last quarter of 2012 and would mean the UK had fallen into its third recession in four years.
It said the pace of recovery since the financial crisis had been hampered by government spending cuts. Continued problems in the financial system and the bleak outlook for the global economy had also contributed to a very weak recovery, as had slow growth in real incomes and worker productivity.
Looking further ahead, the forecaster cut its growth targets for next year from 2% to 1.8%.
The OBR recently asserted its independence from the government with a public spat over comments made by the prime minister, David Cameron.
Cameron claimed the OBR supported No 10's view that the lack of growth since the coalition took office was due to the eurozone crisis, a rise in oil prices and debts from the financial crisis – but not from austerity. But the OBR chairman, Robert Chote, swiftly wrote an open letter to the prime minister saying government spending cuts had knocked 1.4% off GDP in the past two years.
On Wednesday he said austerity measures implemented by this government and the last will knock another 1.9% off growth in 2012-2013, as a direct result of spending cuts and their knock-on effects in the private sector.
The OBR said the most recent revisions to its forecasts are the result of weaker-than-expected trade in a struggling world economy and higher-than-expected inflation from commodity price shocks.
The chancellor, George Osborne, highlighted this in his budget speech, noting that the OBR now expects the UK's key trading partner, the eurozone, to show no growth at all this year.
The OBR also cut its forecasts for growth in household spending, reflecting the squeeze on consumers as inflation outstrips paltry wage increases. It said there was less scope for growth in business investment, after it increased estimates for the levels of investment last year.
On a brighter note, the OBR said the jobs market continued to perform much better than expected, despite the weakness in the economy. Employment rose to 29.7m in the three months to December, compared with the OBR's forecast in December that it would remain at 29.6m. The OBR now expects the unemployment rate to peak at 8% in 2014, before falling back to 6.9% in 2017.
Even after Wednesday's revisions, the OBR continues to be one of the most optimistic of the economic forecasters. By contrast, Capital Economics expects the UK to grow by just 0.2% this year.