Prospects for the UK Economy

By Kirby, Simon | National Institute Economic Review, February 2013 | Go to article overview

Prospects for the UK Economy

Kirby, Simon, National Institute Economic Review

The production of this forecast is supported by the Institute's Corporate Members: Bank of England, HM Treasury, Mizuho Research Institute Ltd, the Office for National Statistics, Santander (UK) plc and by the members of the NiGEM users group.


The current position of the UK economy is undeniably poor. Adjusting for general price inflation, the economy in 2012 was no larger than it had been a year earlier. The economy is in the midst of the most protracted recovery in output in the past one hundred years. In fact economic growth has been absent from much of the past two years. The economy was only 1/2 per cent larger at the end of 2012 than it had been in the third quarter of 2010. Over this period the UK population has continued to expand, implying that the level of per capita GDP has declined by I per cent between the third quarter of 2010 and the final quarter of 2012.

Such poor GDP performance is in stark contrast to the labour market; employment increased by 1 per cent and average hours worked were 0.7 per cent higher over the same period. This leaves us with the conundrum of the absence of sustained economic recovery at the same time as a robust improvement in the state of the labour market. A number of hypotheses have been put forward to solve this puzzle (see the forthcoming OECD Economic Survey of the UK for a summary)--a puzzle exacerbated by its appearance in other, mainly European economies (see figure A7). Rising employment and falling unemployment rates are positive developments, but this poor productivity performance is worrying in its persistence.

Since the end of recession in 2009 much of any output gains have been reversed over a series of quarters. Meryvn King, the Governor of the Bank of England, has described the quarterly growth profile as 'zig-zagging' (see figure 1). Quarterly movements in the volume of GDP are an important contributor to our understanding of how the economy is evolving. However, there is a tendency to focus on movements in one or two quarters rather than on the broader trend. The most recent example of this is the current obsession with whether the contraction in output at the end of last year is the first step to a 'triple-dip'. This distracts from the fact that over the past two years output has been broadly flat. The concern should not be whether or not the economy shrank slightly at the start of 2013 to fulfil the 'technical' definition of recession, but whether stagnation persists throughout 2013.

Economic recovery depends upon a resumption of consumer spending. A balanced economic recovery also requires the resumption of corporate spending and a pick-up in export growth. We project GDP growth of 0.7 per cent this year, rising to around 1 1/2 per cent in 2014 and just over 2 per cent per annum in the period 2015-17. If our forecast is realised, then 2015 would be the first year where GDP growth rises above its potential rate of around 2 per cent per annum since the onset of recession in 2008. The rate of unemployment is expected to remain broadly stable over the next couple of years, at around 8 per cent of the labour force. As economic recovery begins to take hold in 2015, we expect to see a sustained fall in the unemployment rate.


With growth significantly below the economy's potential rate this year there is room for the government to use policy to boost demand. The modest announcement of an increase in investment this year and next is welcome, but this does not translate into a temporary fiscal loosening due to offsets from the scaling back of spending elsewhere. We remain of the opinion that looser policy in the near term, through significant increases in net investment, particularly on infrastructure projects, would reinforce the return to growth in the UK this year.

Temporary fiscal support for the economy would not throw the government's fiscal plans off course. …

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