After years of tough slogging and harsh austerity measures that the Opposition blamed for deepening the downturn, Britain’s chancellor predicted the government will run a surplus by 2018 as he unveiled far stronger growth forecasts.
Speaking in Parliament Wednesday, George Osborne’s revealed that the Office for Budget Responsibility (OBR) now expects British growth of 1.4 per cent this year, up from the tepid 0.6 per cent in the last forecast, and a surprisingly strong 2.4 per cent in 2014, up from 1.8 per cent. Between then and 2017, growth is expected to range from 2.2 per cent to 2.7 per cent, slightly down from the previous forecasts.
The new growth figures will be robust enough to bring down unemployment. The jobless rate will fall to 7 per cent in 2015, the OBR says, two years earlier than previously forecast. The British jobless figure is now 7.6 per cent.
“Britain’s economic plan is working,” Mr. Osborne said as he delivered his autumn economic statement.
While Britain’s finances are improving, albeit slowly, not all the figures were going in the right direction.
The budget deficit, while declining, remains stubbornly large. It is forecast at 6.8 per cent of gross domestic product this year, making it one of the highest among the 28 European Union countries and far higher than that of Italy, the euro zone’s third largest economy. It is forecast to fall to 5.6 per cent next year and 4.4 per cent in 2015.
With deficits intact, the overall debt continues to rise. Mr. Osborne said it will rise to 80 per cent of GDP in 2015-16, up from this year’s 75.5 per cent.
The 7 per cent unemployment forecast in 2015 will have considerable bearing on the Bank of England, whose governor, Mark Carney, has said the bank will keep interest rates at their historic low until unemployment drops to that level. On Wednesday, as Mr. Osborne was speaking, the bank left is benchmark rate unchanged at 0.5 per cent and said it will maintain its asset purchase program at pounds 375-billion.
In a note, ING economist James Knightley said “there is the clear potential for the unemployment rate to drop below 7 per cent…We therefore remain of the view that the first tentative interest rate rise will be implemented in early 2015.”
Britain’s new growth figures put the country apart from most of continental Europe, where the biggest economies are in recession (Italy, Spain) or close to it (France). While overall euro zone growth is turning positive, the growth is so weak that the region’s unemployment rate, now 12.1 per cent, is expected to remain at double-digit levels for some time.
The European Central Bank left interest rates intact Thursday after cutting them by a quarter point, to an historic low, last month. ECB president Mario Draghi is fighting falling inflation rates, which has emerged as the newest threat to euro zone stability.
The ECB said euro zone inflation will stay well below target for the next two years and the central bank is ready to act if necessary to lift a listless economy.
The ECB left its key interest rate at 0.25 per cent at its last policy meeting of the year.
Markets expect further action in 2014, something Mr. Draghi did nothing to deflect.
“We may experience a prolonged period of low inflation to be followed by a gradual upward movement ... later on,” Mr. Draghi told a news conference. “We are monitoring developments closely and are ready to consider all available instruments.”
With a file from Reuters