Insight on the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.
See: www.strategiceconomics.co.uk
This week, the UK Chancellor of the Exchequer delivered his Autumn Statement on the economy and the public finances. I leave analysis of the political impact to others, merely noting that nearly all the economic and fiscal measures in the Statement depend upon the outcome of next May’s election and the subsequent follow through from policy to delivery.
The Statement has a scattering of measures that could benefit Dorset businesses and workers. In several areas, the Chancellor proposed small incentives for each of the drivers of productivity – skills, innovation, investment, entrepreneurship and competitiveness. If they come to fruition, these may well have local benefits for Dorset’s growth – at least over the long term. The Chancellor is keen to favour the productive elements of the economy, however small those favours are. Many of his micro actions can be welcomed by Dorset businesses.
The main economic message, however, if we believe the Treasury itself and the new forecasts from the Office of Budget Responsibility (OBR), is for very little effective rebalancing of economic growth in the foreseeable future. The key weakness – the deficiency in productivity – remains profound and is not expected to reverse soon.
The OBR’s growth, inflation and unemployment profiles are good in headline terms but subdued and modest compared with history and aspiration. Repair of the public finances is again forecast but again delayed. Moreover, this prediction is built on considerable risks and uncertainties, not least assumptions of a revival of real incomes and of the continued willingness of financial markets to accumulate UK bonds.
The following table summarises the latest OBR prognosis.
|
Annual years |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Growth (%ch yoy) |
3.0 |
2.4 |
2.2 |
2.4 |
2.3 |
2.3 |
|
Inflation (&ch yoy) |
1.5 |
1.2 |
1.7 |
2.0 |
2.0 |
2.0 |
|
Employment (%ch yoy) |
2.3 |
1.6 |
0.6 |
0.3 |
0.3 |
0.3 |
|
Productivity (%ch yoy) |
0.7 |
0.8 |
1.6 |
2.1 |
2.0 |
2.0 |
|
Unemployment (% rate) |
6.2 |
5.4 |
5.2 |
5.3 |
5.3 |
5.3 |
|
Fiscal years |
2013/14 |
2014/15 |
2015/16 |
2016/17 |
2017/18 |
2018/19 |
|
Debt ratio (% GDP) |
78.8 |
80.4 |
81.1 |
80.7 |
78.8 |
76.2 |
|
Public net borrowing (£bn) |
97.5 |
91.3 |
75.9 |
40.9 |
14.5 |
-4.0 |
Essentially, the OBR says that:
A better than expected growth rate this year does not lead to better growth in the medium term;
- The lower than expected inflation rate this year persists into 2016;
- Recent bigger than expected falls in unemployment will level out after 2015;
- The implied recovery in productivity over the medium term remains weak by international and historical standards; and
- The short-term ‘worse than hoped for’ aspect of the fiscal numbers is turned into a ‘better future’ – a bigger turnaround after 2015/16.
The OBR seems to base its forecasts on permanent, adverse structural shifts in the UK economy and its public finances. This suggests little scope for underlying improvement in potential growth because the productivity performance does not bounce upwards as we would usually expect to see when an upturn is underway.
There are high risks and severe uncertainties in current economic conditions and I understand the OBR’s caution. Essentially, though, they and the Treasury are offering most of us no break from austerity and little prospect of better living standards over the forecast period. Let’s hope they are wrong but the UK election, the devolution process and the prospect of an in/out EU referendum suggest the uncertainties will not end soon. The optimist in me hopes for an explosion of private investment and export sales for Dorset’s businesses in 2015, rebalancing growth to a more sustainable suture. The pessimist is yet to be convinced.
Meanwhile, enjoy your Christmas before the electioneering really gets underway. I wish a happy, healthy and wealthy New Year to all … despite the dismal official forecasts.
Professor Nigel Jump, 4th December 2014
