Eurozone fears ‘put brake’ on economic growth

The independent forecasting body last month downgraded its prediction for GDP growth next year to 0.7 per cent – compared to 2.5 per cent at the time of the March Budget – in the wake of sluggish economic activity during 2011.

But even this pessimistic outlook depends on the eurozone countries struggling through the sovereign debt crisis without a collapse in the single currency, said OBR chairman Robert Chote. An escalation in the crisis could have knock-on effects on British exporters, banks and interest rates, even though the UK is not in the euro, he warned.

Mr Chote told BBC Radio 4’s World at One: “The economy looks like it has probably grown by less than one per cent during the course of this year and it is not going into next year with a great deal of momentum.

“As we look forward into next year, (the question) is whether we do see the gradual pick-up in underlying economic momentum that our forecast suggests we might hope for.

“The big uncertainty over that is developments in the eurozone. The forecast we presented a few weeks ago assumed that the eurozone struggles through.

“Clearly, if things turn out worse than that, it means a lot more uncertainty about the near-term prospects.”

Because the eurozone crisis could develop in several different ways, it is difficult to predict exactly how the UK might be affected, said Mr Chote.

But he said that there were possible negative impacts through a fall in demand for British goods in major export markets in Europe, the exposure of UK banks to defaults overseas or increases in the cost of consumer, business and state borrowing.

“We identify it as a significant downside risk, but it is very difficult to point to a particular alternative state of the world that would be representative of all the ways it could turn out,” said Mr Chote.