UK Economy GDP Growth Forecast 2010 to 2015

This analysis is a continuation of the UK Debt Forecast article (UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) on the impact of the new coalition government having effectively hit the reset button on the UK economy to now primarily target a reduction in the £156 billion annual budget deficit which aims to suck £113 billion a year out of the economy by 2015-16 by means of swinging public sector spending cuts and tax rises. The government has now clearly reversed the Labour governments policy of continuous fiscal expansion and set the country on a course for severe fiscal contraction for at least the next 3 years.

This analysis seeks to update my existing UK GDP growth forecast for the next 5 years. The analysis of December 2009 concluded in a trend forecast as illustrated below, with the most recent UK GDP data confirming strong growth data for the second quarter of 2010 of 1.1%, annualised to 4.4%, which caught the mainstream press, academic economists and even the City by surprise who had typically penciled in growth expectations of between 0.3% and 0.5% and remain firmly fixated on the prospects for a UK double dip recession.

Existing UK GDP Forecast Growth Forecast 2010-2012, Preliminary 2013-2014

The UK economic GDP growth for 2010 Q2 came in at 1.1% compared against my forecast of December 2009 Q2 growth of 1.3%. The growth trend is inline with my forecast expectations that projected a strong economic recovery starting in Q4 2009 and for the whole of 2010 continuing into 2011 as illustrated below.


UK GDP Growth Forecast Conclusion


The sum of the above analysis is for a strong economic recovery into the end of 2010 which given the pessimism today I term as the Stealth Election Boom that followed the Stealth Bull Market of 2009, the economic 'boom' will continue in to a peak in Q1 2011, which will be followed by weakness during 2012 and 2013 and strong recovery for 2014, and into a 2015 summer general election, breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and taking account of the election cycle preliminary GDP projections for 2012 of +1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015.

Therefore I just cannot see this double dip recession that the mainstream press and so called think tanks are obsessing over at this point in time, no year on year economic contraction or even a quarter on quarter dip is visible.

The following graph illustrates my trend forecast for quarterly GDP growth over the next 2 years 2010 and 2011.

chart1

Growth for the first half of 2010 now stands at 1.5%, which compares favourably against my expectations for 2010 growth of 2.8% and compares against forecasts of academic economic institutions as the below table from the Inflation Mega-Trend Ebook illustrates.



UK Economic Growth 2010

Forecaster  - Forecast
  • European Commission   +0.9%
  • International Monetary Fund  +0.9%
  • David Kern, British Chambers of Commerce  +1.1%
  • Organisation for Economic Co-operation and Development   +1.2%
  • Alistair Darling, Treasury     +1% to +1.5%
  • Bank of England   +2.1%

Coalition Government Austerity Measures

The June 2010 Emergency Budget announced intentions to take £40 billion out of the economy during 2010-11, rising to a total drain of £113 billion per year by 2015-16 so as to cut the budget deficit from £156 billion per year down to £20 billion by that year. The key measures announced were -

* Spending cuts of 25% on non ring fenced budgets
* Public sector pay frozen for 2 years for those earning over £21k
* VAT Rise to 20% from 1st Jan 2011.
* Capital Gains Tax Rising to 28%
* Housing Benefit Capped at £400 per week
* Inflation indexation switch from RPI to CPI
* Child Benefit frozen.
* Disability Benefit claimants targeted
* Tax credit receipt income limits reduces.
* Corporation Tax 1% cut per year.
* £2 billion bank levy

Where the economy is concerned the policy that will have the most impact on the U.K. economy are public sector spending cuts that won't start to bite until October, with many of the cuts not materialising until well into 2011 which suggests that the real impact of the governments austerity plan won't be felt until Q2 2011. Coupled with the VAT rise from 1st of January 2011 implies significantly lower growth for 2011 than my original forecast of 2.3%.

Coalition Government OBR UK GDP Forecasts

The coalition governments own independant body (though housed in the Treasury) for forecasting economic growth has revised its own expectations (June 2010), and are compared against my Dec 2009 forecasts (NW):

* UK GDP 2010 = 1.2 / NW 2.8%
* UK GDP 2011 = 2.3 / NW 2.3%
* UK GDP 2012 = 2.8 / NW 1.1%
* UK GDP 2013 = 2.9 / NW 1.4%
* UK GDP 2014 = 2.7 / NW 3.1%

As the most recent data shows the governments own forecast for UK GDP for 2010 has already become redundant as growth already stands at 1.5% for 2010. However 2.3% for 2011 matches my forecast of 6 months earlier which sends my own alarm bells ringing, though there is significant difference for 2012 and 2013 where the OBR / Government appear overly optimistic.

Academic Economists Flawed Theoretical models

The academic economists that populate the mainstream press are obsessed with the demand side of the equation i.e. Keynesian stimulus that calls for every more deficit spending debt accumulation that will always FAIL to delivery, whilst at the same time ignoring the supply side of the economic equation that succeeded in resolving the 1980's mini-depression into an economic boom as a consequence of supply side changes to the UK economy. The coalition government appears to be following this working model as it takes an axe to Labour's out of control public sector spending and the deficit whilst laying out plans for cutting corporation taxes, even if income and indirect taxes such as VAT are on the rise.

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