City pours scorn on Brown's forecasts of economic growth

The City gave a damning verdict on the Budget yesterday as investment banks cut their estimates of growth even further below the Government's optimistic forecasts.

Economists in the Square Mile have cut the average forecast for GDP growth this year to 1.8 per cent from 1.9 per cent in March, compared with the Budget prediction of between 2 and 2.5 per cent.

Growth in 2004 is now expected at 2.3 per cent rather than the 2.4 per cent average for March, according to research published by the Treasury. This is way below Gordon Brown's forecast of 3 to 3.5 per cent.

Meanwhile public spending is expected to fall even deeper into the red than the Treasury forecasts. The City expected public sector net borrowing (PSNB) to hit £28bn in the current financial year rather than £27bn in March and the Chancellor's £24bn. The City now expects the PSNB to hit £30bn in the following year even though the Treasury believes the deficit will fall to £24bn.

One investment bank, Lehman Brothers, has raised its forecast to a £39bn deficit from £35bn in March. "The Chancellor will have to make further significant upward revisions to his borrowing numbers by the time of [November's] pre-Budget report," Alan Castle, a Lehman economist, said.

The Treasury is understood to be relaxed about the reaction to its forecasts, saying they follow from its estimate that the economy is currently growing 1 percentage point below trend.

This week it hinted that it expected the Bank of England to revise up its own growth forecasts in next month's quarterly inflation report on the back of the recent fall in the sterling exchange rate.

Meanwhile Otmar Issing, the European Central Bank's chief economist, yesterday added to speculation of a possible cut in interest rates, forecasting that inflation would fall below 2 per cent next year. His comments follow signs of a split on the ECB from two interviews with senior figures on the bank this week.

Yves Mersch said an inflation rate that would fall below the ECB's 2 per cent ceiling "is not an argument in itself" to lower rates, while Ernst Welteke said such a drop "opens up room" for even lower borrowing costs.