UK Growth Forecast Cut, Gov’t Urged to Ease Austerity

One of Britain's leading economic think tanks has reduced its forecast for economic growth and called on the chancellor to relax fiscal austerity where possible in next month's budget.

The National Institute of Economic and Social Research expects economic output to grow by 1.6% in 2017 and 1.7% in 2018. As recently as August NIESR expected growth of 1.7% this year and 1.9% next year, DigitalLook reported.

NIESR said the main reason for cutting its forecasts was bleaker prospects for productivity. After disappointing figures for output per hour NIESR said it expected productivity gains of 1% on average over the next five years and not 1.2% as previously forecast.

The economy expanded by 0.4% in the third quarter, slightly faster than most economists expected but in line with NIESR's forecast. NIESR said the economy's slowdown was almost certainly due to last year's vote for Brexit, which has pushed up prices and suppressed business investment and productivity.

Without the Brexit vote, the average household might be more than £600 ($797.9) a year better off, NIESR said.

Austerity Fatigue

Garry Younge, NIESR director of macroeconomic modeling, said Philip Hammond, the chancellor, should "make full use of the fiscal space available within the existing rules" to take account of weaker productivity. "There is scope at the margins to relax fiscal austerity a little while maintaining long-term fiscal discipline," he added.

Hammond is due to present his budget to parliament on November 22. He must balance efforts to achieve self-imposed fiscal targets with pressures to increase public spending and support the weakening economy.

NIESR said: "Austerity fatigue has set in and the government is under pressure to raise spending across the board, in welfare, health, education, housing and salaries. Of these, perhaps the biggest risk to public finances is the cap on public sector wages.

"A material increase in public sector wages has the potential to spill over into the private sector and that would have consequences for both fiscal and monetary policy."

Greg Clark, the business, energy and industrial strategy secretary, said on Tuesday: "We have the most regionally unbalanced economy in Europe. All but two of the core cities outside London are below the national average in output per head.

"We have areas that have never recovered from deindustrialization, are trapped with poor infrastructure, low investment and skills. And we have rural and coastal peripheries that are some of the poorest places in the country. The results are reflected in our sour politics."

SME Optimism Falls

A survey of almost 400 small to medium sized companies showed that output growth slowed in the past three months, with a record one in four citing labor shortages as limiting their investment plans.

The Confederation of British Industry said its study found that two out of five firms were working below capacity, while investment in plant, machinery and buildings is expected to be cut back. But there has been an increase in new orders, while hiring intentions for the next few months remain “robust”.

Alpesh Paleja, the CBI’s principal economist, said: “The latest survey suggests mixed fortunes for our smaller manufacturers. “While growth in new orders has held up and headcount has risen strongly, output growth has lost some steam over the last quarter.

“Coupled with ongoing pressure from labor shortages, it’s understandable that optimism among manufacturers has fallen. “The chancellor should use the budget to fire up our factories by reforming business rates, and setting out a clear plan to bring the UK’s industrial strategy to life.”

House Price Index

The annual rate of house price growth rose to 2.5% in October, from 2.3% in September, according to the latest Nationwide house price index. Prices went up 0.2% on a monthly basis, down slightly from 0.4% growth in the previous month.

Nationwide's chief economist Robert Gardner said: "Low mortgage rates and healthy rates of employment growth are providing some support for demand, but this is being partly offset by pressure on household incomes, which appears to be weighing on confidence. The lack of homes on the market is providing support to house prices."

Gardner noted the increasing likelihood of a rate rise Thursday, but said he expects this to have a "modest" impact on most UK households.