The government’s independent economic watchdog will tear up its previous forecasts for the UK’s growth prospects as it gives its first official verdict on the outlook for post-Brexit Britain this week.
The Office for Budget Responsibility is expected to paint a gloomy picture of lower growth, higher inflation and a larger-than-expected deficit as the UK negotiates its way out of the EU.
The new forecasts will form a central part of Philip Hammond’s maiden autumn statement on Wednesday, as the chancellor seeks to provide support for the economy against a more challenging backdrop.
Growth forecasts at the time of the budget in March – two months before the shock referendum outcome – will be revised down for 2017 from 2.2% to between 1.25% and 1.5% according to the forecasting group EY Item Club. The International Monetary Fund is forecasting UK growth of just 1.1% next year, which would be the lowest rate of annual growth since 2009 when the economy shrank by 4.3% in the depths of the financial crisis.
The OBR is also expected to say that consumer prices will rise at a faster rate than it was expecting back in March, as the sharp drop in the value of the pound since the Brexit vote pushes import prices up and feeds through to the high street. Economists expect the OBR to revise up its forecasts for inflation in 2017 from 1.6% to closer to 3%.
Meanwhile, the watchdog will revise up its forecasts for government borrowing, possibly by as much as £100bn over the next five years, as weaker growth weighs on tax receipts. Hammond has already said he will abandon the plans of his predecessor, George Osborne, to return the public finances to surplus by 2019-20.
Martin Beck, senior economic advisor to the EY Item Club, said: “In the eight months since the budget the entire fiscal landscape has changed. The OBR faces a challenge in cutting through the post-referendum fog to produce a clear outlook for the UK economy.”
The more downbeat assessment from the OBR will follow an unexpected show of resilience from the UK economy in the months immediately after the referendum, as consumers appeared to shrug off any uncertainty caused by the Brexit vote.
The Office for National Statistics is expected to confirm the economy grew by 0.5% in the third quarter when it publishes its second estimate of gross domestic product on Friday. It was a stronger-than-expected performance, and ruled out the possibility of a recession in the second half of 2016.
The IMF believes the UK will be the fastest growing of the G7 leading industrial countries in 2016, with growth of 1.8%.
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