Tomorrow we publish Economic Prospects: 2012 - our review of the key challenges that lie ahead for the UK economy and manufacturing in the next twelve months.
Ahead of this, here is a look back at our predictions for 2011; how they played out; and why growth turned out to be slower than we expected.
Back at the start of 2011 we laid out four key challenges for the year ahead:
Unfortunately (but illustrating that economists can – sometimes – get it right) all of these proved problematic.
Access to Finance was an issue throughout the year, especially so for SMEs. After some modest improvement in credit conditions in the first half of the year, both cost and availability appear to have worsened again in recent months. This does not augur well for 2012 given banks are looking to refinance themselves in this year, potentially against a background of very strained global financial markets.
Government spending cuts have significantly dented public sector employment. The OBR now anticipates these cuts will eventually top 700,000 compared with 400,000 at the time of the March Budget. At a time when private sector job creation was limited, this led to deterioration in the UK labour market in the latter part of 2011.
The first half of 2011 saw sharp rises in producer prices leading to consumer price inflation. The combination of higher-than-expected inflation and public sector job losses held down private consumption.
Commodity prices started to fall away in the latter half of 2011 as global demand slowed, partly as a result of our fourth concern: the escalating crisis in the eurozone.
The biggest issue in the latter half of 2011, and one that looms large at the start of this year, was undoubtedly the eurozone debt crisis and its apparently infinitely delayed resolution.
The considerable amount of uncertainty the crisis has created has hit global demand. Faced with ongoing uncertainty, companies have put a premium on maintaining cash and are holding off investment. Customers from both within the EU and beyond, appeared to be holding off placing orders as concern for short term growth prospects became more acute.
So that was how our predictions played out. However, as the table below shows, our forecasts for GDP growth and for CPI normalisation proved over-optimistic.
- A couple of unexpected events occurred: notably the Arab Spring (and its ensuing effect on the oil price) and the Japanese tsunami (which hit the supply chains of manufacturers in the UK)
- The greater-than-expected impact of the eurozone crisis had a significant impact on growth as it cast a large shadow over business confidence.
- Growth was also hit by markedly subdued consumption as consumer confidence was knocked by elevated inflation, and limited pay rises.