GDP - How our expectations have fallen

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Ahead of tomorrow's GDP release for q3 it is sobering to realise that October's most optimistic GDP forecasts for 2011 are now at the same level as the most pessimistic forecasts at the start of the year.

How our expectations have fallenIndependent forecasts for GDP growth in 2011 (year on year % change)Source: HMT 2011

This fall in forecasts has been predominantly driven by a fall in expectations for consumer spending. At the start of 2011, the median forecaster supposed that consumption would grow by 1.2% this year. The median forecaster now expects that consumption will have contracted 0.8 by the end of 2011.

Relatively weak consumption looked likely at the start of the year, due to inflation-squeezed incomes and a sub-par labour market, but the news regarding consumers' confidence and spending has progressively weakened all year. Last Friday's publication of GfK NOP's consumer confidence index shows that peoples' outlook remains decidedly gloomy. With more and more households thinking that now is a good time to save – and therefore not to spend – it is clear why the forecasts show consumption dragging on growth this year.

Consumption, investment and exports all expected to be weakerMedian forecasts for components of growth in 2011 (year on year % change)Source: HMT, 2011

But it's not just consumption. The median forecast for investment growth in 2011 has also moved into the red. This reflects the fall in business confidence resulting from events such as the political paralysis in the Eurozone and US that was evident in the PMI surveys over the summer. This is bad news if we want a better balanced economy.

Although tomorrow's GDP release will provide some insight into just how reliable these forecasts are, what is clear is that the external environment has become much more challenging and the outlook for growth has become incredibly uncertain. The significant downside risks to growth are likely to weigh on companies' investment decisions in the next year or so.

This has implications for the UK economy's growth potential and, as such, for the government's fiscal mandate. Last week we outlined our suggestions to support growth, particularly around tax and finance which should support investment.

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