The Centre for Economics and Business Research has revised its GDP growth forecast for 2004 from 2.4% to 2.5%.
Forecast growth for 2005 has also been revised up, from 2.1% to 2.3%. Beyond 2005, growth is forecast to be stable in the 2.2-2.5% range.
But the CEBR says the forecasts show, and this is supported by the new GDP data released on Friday March 26 2004, that the underlying trend for UK economic growth remains sluggish at 2.3% and that the slightly faster growth forecast in the short-term will be bought at the expense of slightly slower growth in later years.
Overall growth is forecast to remain in the 2-2.5% range for six consecutive years.
On the face of it, the forecast looks like a positive result for chancellor Gordon Brown's economic policies. But the CEBR warns of two particular concerns. First, the risk of a 'hard landing' has increased to over 20%. Such a risk would come initially from a consumer spending and house price overshoot that then had to be offset by higher interest rates that might lead to a collapse in confidence at a time when sentiment towards sterling was becoming less positive.
If the markets became bearish about sterling at the same time as growth was being subdued by high interest rates, it might be difficult for the MPC to cut rates again fast enough to prevent a hard landing.
Second, even without a hard landing, because growth is predicted to be at an average rate more than 0.5% per annum below the chancellor's forecasting assumption in the medium-term, government tax revenues are forecast to undershoot compared with the government's assumptions. As a result, without either cuts in spending or rises in taxes, the government is forecast to borrow between £40bn and 45bn a year for the foreseeable future.
While the markets are likely to be prepared to lend amounts on this scale, the forecast suggests rising bond yields – the 10-year gilt is forecast to yield 5.3% by mid-2005. In addition the chancellor is forecast to have to break his borrowing targets if he wants to avoid further tax rises.