The revised economic forecast downwards for the UK provides a troubling backdrop for domestic markets ahead of the expected negative impact of Brexit, chief economists have warned.
Yesterday's (22 November) Autumn Budget saw the chancellor announce figures from the Office of Budget Responsibility (OBR) which showed the UK is only expected to grow 1.5 per cent in 2017 - a downward revision from the prediction of 2 per cent made only in March.
Additionally, in the following years up until 2021 the figures have been revised down further, largely due to the persistent weakness in productivity growth since the financial crisis.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics said: “On the one hand, the OBR’s prediction that GDP will rise by just 1.3 per cent in 2019 and 2020 could well be too pessimistic, assuming that a hard Brexit is avoided.
“But on the other hand, the cost of further increases in income tax thresholds, and likely freezes in fuel duty, are not embedded in the forecasts. The OBR also is making no allowance for any divorce payment to the EU that likely will made soon.”
With deficit reduction remaining on track, the chancellor had some headroom for targeted spending, including extra cash for the NHS, the abolition of stamp duty for first time buyers for properties up to £300,000, the freezing of most excise duties, extra spending on homebuilding and changes to the universal credit system.
Borrowing is forecast to be £49.9bn this year; £8.4bn lower than forecast at the Spring Budget. It is set to reduce further from £39.5bn next year to £25.6bn in 2022/23.
But analysts stressed the scale of the challenge facing the government to drive growth was outstanding.
Jonathan Loynes, chief economist at Capital Economics, said: “There may be some doubt over the validity of some of these revenue sources and concerns that Mr Hammond has bent his own fiscal rules.
“Nonetheless, the net effect of the changes has been to ease back on the pace of austerity over the coming years, with the fiscal stance now tightening by less than 0.5 per cent of GDP next year and even less in the outer years of the forecast."
Aberdeen Standard Investments chief economist Lucy O’Carroll, added: “The chancellor’s war chest has dwindled to £14bn. He’s tried to frame this as a choice on his part. But it’s a consequence of harsh economic reality.
"It’s also a tiny margin to play with when you consider that total tax revenue and public spending run to hundreds of billions every year.”
Brexit remains the key area of uncertainty for both GDP growth and the budget deficit, with the key unknown according to analysts being, whether a comprehensive deal can be achieved in both the goods and service sectors.
The chancellor has committed to spending £750m on Brexit preparations, with a further £3bn set aside, while remaining vague on when he expects the deficit to return to a surplus.