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Economy: Ahead of expectations, but only just

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21st Mar 2012
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The Office for Budget Responsibility’s (OBR) figures painted a mildly improved picture of the economy in what has been a watershed moment for the Chancellor who has had to contend with a worsening economic outlook in previous years.

The OBR "slightly revised" up the figure to 0.8% for 2012 - coming in ahead of expectations and on target to meet its fiscal targets.

It expects the British economy “to avoid a technical recession with positive growth in the first quarter” of this year after the economy “carried a little more momentum into the new year than previously anticipated”.

The OBR forecasted growth of 2% for next year, 2.7% in 2014 and then 3% in both 2015 and 2016.

It added that “the situation in the euro area remains a major risk to our forecast”, but that risks for the British economy are “broadly unchanged” since last November’s report.

The unemployment rate forecast remains the same as it was last autumn – with the OBR expecting the rate to peak this year at 8.7%, before falling each year to 6.3% by the end of the forecast period.

The Office for National Statistics (ONS) also revealed on Tuesday that inflation continued to fall in the last month. Easing inflation is seen as crucial to the economic recovery; however, the Bank of England's target for inflation is an optimistic 2% by the end of the year on the Consumer Prices Index (CPI) measure.

In February CPI inflation fell to 3.4% down from 3.6% in January, while Retail Prices Index (RPI) inflation - which includes mortgage interest payments - was 3.7% down from 3.9%.

The ONS said that average gas and electricity bills fell in the last month, however higher food and alcohol prices stopped a further decline.

Inflation has been falling since September and the CPI rate is now at its lowest since November 2010, which it is hoped will boost consumer spending.

Commenting on the figures, David Kern, chief economist at the British Chambers of Commerce (BCC), said that although a fall in inflation was unsurprising, it was not as rapid as most analysts expected.

“The marked increases in world oil and food prices since the beginning of the year are worrying, and support our view that further declines in domestic inflation, both this year and next, will not be as sharp as the MPC predicted in its inflation report,” he said:

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: “It is clear that household finances remain under severe pressure, with inflation still around two percentage points above earnings growth.

"This gap should close through the year and we expect wages to be growing in real terms by the end of 2012. However, this improvement could be derailed by a spike in oil prices which would maintain the pressure on household finances and threaten the growth outlook. The decision over whether or not to go ahead with August’s planned increase in fuel duty in tomorrow’s Budget will be a difficult one for the Chancellor to resolve.”

The ITEM Club also recently released its outlook for Financial Services, predicting that the real effect of the ongoing funding crisis in the banking industry will begin to be seen, as overall bank lending contracts for the first time since 2009.

This comes at a time when the government announced a £20bn loan guarantee scheme offering cheaper credit to small companies, however many remain sceptical as to whether a 1% drop in rate will be enough to kick-start SME lending.

The ITEM Club added that the growth of payday loan companies and alternative corporate funding vehicles is also set to continue at pace, “as the paralysis of bank lending opens up the market further to alternative or ‘shadow’ banking at both ends of the market” [Full ITEM Club report from February 2012]

Baker Tilly commented on the government’s strategy for growth moving towards shoring up government finances: “we can be pretty sure there will be no substantial tax cuts in the March 2012 Budget. It is more likely that we will see a limited number of focussed tax hikes intended to make the UK tax system more progressive.” The Chancellor has pledged to help low and middle earners in this Budget, and as such the government has an ambition to increase the income tax personal allowance to £10,000 by the end of this parliament.

Other economic indicators include unemployment rising by 27,700 in the three months to January, bringing the jobless rate up to 8.4%, compared with 8.3% in the three months to October. Cavendish also revealed in its economics brief that average earnings growth fell to 1.4% in January down from 1.9% in the previous quarter. Despite higher exports the trade deficit widened in January to £1.8bn up from £1.2bn in December.

AccountingWEB Budget 2012 resources - sponsored by Sage:

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