One of the hints that a downgrade is on the way is that Chancellor George Osborne, who has already received the OBR’s updated forecasts, has recently become more vocal about the risks facing in the UK economy. Earlier this week he warned that the world is currently a more uncertain place than at any time since the global financial crisis.
The Chancellor has a point as it has not been all plain sailing since the Autumn Statement. The two main developments have been the US Fed – perhaps prematurely - starting to raise interest rates late last year, and a major bout of volatility in global stock markets in February.
GDP growth outlook set to be lowered
The OBR’s economic forecasts in the Autumn Statement now look ripe for a revision. The UK economy was expected to grow 2.4% this year and 2.5% in 2017, with private consumption the main growth driver, followed by business investment. Yet both of these GDP expenditure components will probably provide less support than was thought.
Private consumption, though remaining the main growth driver, is set to come under pressure from slower job growth and rising inflation. At the same time, the low crude oil price continues to drag on investment by North Sea oil and gas companies and their suppliers. We recently revised down our GDP forecasts for this year and next to 1.9% and 2.2%, respectively.
Business investment forecasts need a trim
The OBR’s forecasts of business investment look particularly vulnerable to downward revision. In the Autumn Statement, business investment was expected to grow more than 7% in both 2016 and 2017. While the Brent crude oil price has risen gradually since the start of the year to around $40 per barrel currently, it is still too low to prompt North Sea oil and gas companies to start buying capital goods again. Our latest Manufacturing Outlook survey showed that sectors embedded in the oil and gas supply chain - such as mechanical and electrical equipment, and basic metals - remained weak.
One of the arguments in favour of strong business investment in the coming years is that the financial position of UK corporates is robust. However, we take the view that this is probably precautionary in the wake of the financial crisis rather than businesses gearing up for major investment. We are forecasting private sector business investment will expand by around 5% in 2016 and 2017.
Another reason our GDP forecasts are lower than the OBR’s is that we are more pessimistic about net trade. We expect net trade to be particularly weak this year as the economic slowdown in emerging markets such as China weighs heavily on demand for UK exports. The OBR in the Autumn Statement forecast net trade to be only a small drag on GDP in 2016 and 2017.
The bottom line
The OBR revising down its economic forecasts will have adverse consequences for the Chancellor, making it harder for him to meet his goals of reducing the government debt as a proportion of GDP each year, and returning the budget balance to surplus by the end of the parliament.
We will be blogging the key measures in the Budget, and the OBR’s revised forecasts, on Wednesday.