Watchdog to slash forecasts for British economy

The Office for Budget Responsibility (OBR), which was formed by the Government to provide an independent assessment of the economy, said in November that GDP would grow by 2.1 per cent in 2011 and by 2.6 per cent the following year.

But economists say the outlook has declined over the winter months and the OBR’s forecasts are now too optimistic.

Philip Shaw, an economist at Investec Securities, said he would not be surprised if the OBR lowered its forecast for 2011 to 1.7 per cent from 2.1 per cent, while the 2012 forecast might also be lowered by a shade.

Since the last forecast was made it emerged that the economy contracted by 0.6 per cent in the final quarter of 2010, hindered by December’s Arctic weather.

Although there are indications that the economy has picked up in the early months of 2011, the effect of the Government’s budget cuts are yet to be fully felt, while consumer spending is being squeezed as wages fail to keep pace with rising inflation.

Recent events in Japan and Libya have made the problem worse.

Mr Shaw added that the bank holiday for the Royal Wedding will have an adverse effect on the second quarter of 2011.

Influential think-tank the Organisation for Economic Co-operation and Development (OECD) last week downgraded the UK’s growth forecasts for 2011 from 1.7 per cent to 1.5 per cent as the austerity measures weaken growth and global trade remains in the doldrums.

The 2.8 per cent forecast for inflation in 2011 is also expected to be revised upwards after the Consumer Prices Index (CPI) rose to four per cent in January.

Economists at Barclays Capital expect the OBR to reduce its prediction for public sector borrowing, despite the drop in the growth forecasts.

Total public borrowing for the year to date stood at £113bn in January, the ONS said, £14.1bn lower than in the same period in the previous financial year.