Growth forecasts brought into line with view from the City

Economics

The Chancellor defied consensus opinion to pencil in a solid economic recovery after admitting that the current slowdown had been far worse than expected.

The Chancellor defied consensus opinion to pencil in a solid economic recovery after admitting that the current slowdown had been far worse than expected.

Gordon Brown ended months of speculation and slashed his growth forecasts for this year and 2003. He said the economy would grow just 1.6 per cent this year.

Next year growth will be about 2.75 per cent rather than the ambitious 3.25 per cent predicted in the Budget.

This puts him in line with the forecasts of the City economists who have said, for months, that Mr Brown was too optimistic.

An analysis of City forecasts compiled by the Treasury puts growth at 1.6 per cent this year and 2.5 per cent next year. But to offset some of the impact, growth in 2004 is raised from 2.75 to 3.25 per cent.

Some were sceptical about his bullish forecast of a recovery further out. John Butler, UK economist at HSBC, said: "He is gambling on an economic rebound in 2004."

The report itself showed the main culprit for the cuts in growth was the slump in business investment, currently falling at its fastest rate in 37 years.

The Treasury was quick to defend its record on forecasting, saying it was not alone in cutting its predictions.

Fixed investment fell by 4.25 per cent rather than growing by 1.75 per cent as anticipated in the Budget. To make up for this the Treasury now forecasts growth of 6.75, 4.25 and 4.5 per cent over the next three years.

Simon Rubinsohn, chief economist at City brokers Gerrard, said: "Where there are risks – and the risk is the important thing – they are that we won't get this level of investment."

The Treasury continues to believe that the severe imbalance between a booming housing market and industry in recession that causes a headache for the Bank, will unwind. While investment and export volumes rebound, consumer spending is forecast to slow down.

On inflation Mr Brownpencilled in a target of 2.25 per cent next year, which may add to speculation of a cut. But the money markets seized on the appointment of the hawkish Mervyn King as the Bank of England's new governor to raise their forecasts for rate hikes next year.