Britain’s recovery is expected to start running out of steam next year as the next government squeezes public spending and the hoped-for boost to exports fails to materialise, according to the Treasury’s independent forecaster.
Growing reluctance among consumers to fund their spending with unsecured loans and credit cards will also drag on economic growth.
The Office for Budget Responsibility (OBR) said it now expected higher growth this year and next of 3% and 2.4% respectively – up from previous forecasts of 2.7% and 2.3% – but it said that would fall to 2.2% in 2016, lower than previously forecast.
For the rest of the next parliament GDP growth will remain below the long-run average of 2.5%, indicating that Britain enjoyed only a brief post-crash boom rather than generating a sustained recovery capable of making up the loss of output in the recession.
The OBR report cements the view that the next five years will produce only modest growth without a return to the levels of productivity last seen in the early part of the century.
Without a return of strong productivity growth, living standards can improve only by inflation remaining lower than rises in earnings or households enjoying year-on-year tax cuts.
The shadow chancellor, Ed Balls, said the government had failed to raise productivity, instead presiding over a boom in low-wage and part-time jobs, many of them tied to zero hour contracts.
“I know the chancellor wants to blame the poor growth performance and poor productivity growth on the eurozone. I share his concerns about the eurozone –we do need a plan for stronger growth in Germany and across the continent.
“But the weakness of the eurozone cannot explain why, despite the notable successes of a number of our companies, our export performance has been so poor – and so much worse than other eurozone countries.”
Balls said Britain’s export performance ranked 16th in the G20 and 22nd out of the EU’s 28 member states. OBR figures show that among G7 countries only Italy had lower productivity than the UK.
Productivity growth is driven by increases in investment in new machinery, equipment and buildings that allow workers to achieve a higher output in the same amount of time. In 2010 the OBR predicted a return to strong investment growth in the following year, but it was not until 2013 that overall fixed investment growth reached 8%.
Business investment growth is forecast to accelerate next year from 7.7% in 2014 to 8.4%, but then fall back to 6.3% for the following four years.
The housing sector, which absorbs a large slice of private investment, is also expected to slow dramatically. Private investment in dwellings, which includes housebuilding and maintenance, is forecast to slump from a post-crash high of 13% annual growth this year to 2.4% by 2019. Likewise, growth in government investment will fall from 3.3% this year to 1.6% in 2016 before staying below 2.3% for the rest of the parliament, dragging the total for fixed investment from 8.1% in 2014 to 4.8% in 2019.
George Osborne said Britain was on track to grow at a stronger pace than European rivals and with “meaningful real wage growth”. He said earnings will rise faster than inflation next year and for the next 5 years.
The chancellor said “robust monetary policy arrangements with the Bank of England” had brought inflation down below 2% and would keep inflation low for the next five years. The OBR lowered its forecast for inflation to 1.5% this year, 1.2% next year and 1.7% the year after, before returning to the 2% target.
“So we have lower inflation, lower unemployment and higher growth,” Osborne said.
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