Forecaster now expects economy to grow by just 1.5% in 2017, rather than 2% originally suggested in March

Britain’s growth prospects are far weaker than previously thought, according to the Office for Budget Responsibility, as stalling productivity and cash-strapped consumers provide a bleak backdrop for the economy.

The government’s independent economic forecaster sharply downgraded its growth predictions and now expects the economy to grow by just 1.5% this year, after predicting 2% growth back in March at the time of the last budget.

Q&A What is the Office for Budget Responsibility? Show Hide The Office for Budget Responsibility is the government’s independent forecaster, which gives its verdict on the outlook for growth and the public finances twice a year. The forecasts are published to coincide with the chancellor’s two big set pieces of the year – the autumn budget and the spring statement – and takes into account the impact of any tax and spending measures announced in those statements. The OBR also uses its public finances forecasts to judge the Treasury’s performance against the chancellor’s fiscal targets, stating whether or not it has a greater than 50% chance of hitting the targets under current policy. It was established in 2010 by the then chancellor George Osborne with the aim of improving the credibility of the government’s official forecasts for growth. The forecasts were previously produced by the Treasury itself and often criticised for being unrealistic. The OBR is led by three members of the budget responsibility committee, including chairman Robert Chote, a former director of the Institute for Fiscal Studies, with support from the OBR’s permanent staff of 27 civil servants.

Growth then slows to 1.4% next year and 1.3% in 2019, which would be the weakest rate since 2009, when the UK economy was in the depths of the financial crisis.

Robert Chote, chairman of the OBR, said the bleaker outlook for growth reflected poor productivity – the amount of output generated per hour worked – in Britain and the additional strain placed on households by the sharp fall in the value of the pound since the Brexit vote. A weaker pound has driven up the cost of goods imported from abroad and fed through to higher inflation, which is expected to peak at 3% by the end of 2017.

“The UK economy has slowed this year as households’ real incomes and spending have been squeezed by higher inflation. The persistence of weak productivity growth does not bode well for the UK’s growth potential in the years ahead,” the OBR said, in a gloomy assessment of Britain’s economic prospects. “We have lowered our real GDP forecast in every year.”

The OBR’s view of GDP growth is now more pessimistic than that of the Bank of England, which is predicting increases of 1.6%, 1.6% and 1.7% over the next three years compared with the OBR’s 1.5%, 1.4% and 1.3% over the same period.

Brexit-related uncertainty is affecting firms’ appetite for investing in new machinery, technology and people, with dire consequences for productivity, according to the OBR, because such advances would allow businesses to produce more in less time.

It conceded it had been too optimistic about the prospect of a pick-up in productivity, which has stalled since the financial crisis. The productivity slowdown has limited growth, weighed on living standards and put the UK behind most of its peers in the G7 group of leading industrial nations.

In its latest assessment for the health of the economy, the OBR finally abandoned its previously consistent view that productivity growth would return to its pre-crisis trend of about 2% a year. It now expects productivity growth of just 0.9% this year, rising to 1.2% in 2022, with a knock-on effect on overall economic growth.

The Resolution Foundation thinktank said family finances would be hard hit by weaker productivity. “That downgrade has huge implications for family finances over the remainder of the parliament. Disposable incomes are now expected to be £540 lower by 2023 than forecast in March,” the thinktank said. “Pay is not set to return to its 2008 peak until the middle of the next decade, with Britain now facing a 17-year pay downturn.”

The weaker outlook for growth is expected to place greater strain on the public finances over the coming years, with borrowing expected to be cumulatively £29bn higher by 2021-22 than the OBR predicted in March. However, the higher borrowing total also reflects the chancellor’s decision to ease the pace of austerity – by spending more on a number of budget giveaways – as well as weaker growth.

“The chancellor has been bolder than widely expected and has bowed to pressure to ease the near-term pace of the fiscal consolidation,” said Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.

Despite raising its forecasts for total borrowing over the five-year forecast horizon, the OBR revised down its prediction for 2017-18 to £49.9bn from £58.3bn in March.

“Public sector borrowing is lower today than we expected in March, but the revisions to our economy forecast weaken the outlook for tax receipts and put upward pressure on borrowing in future years,” Chote said. “On top of the forecast changes, the government has announced a fiscal giveaway that adds to borrowing in all but the last year of the forecast.”



Chote said the government was unlikely to run a surplus – where government income exceeds expenditure – until 2031, meaning the government would miss its target of eliminating the deficit – where expenditure exceeds income – by 2025.

Suren Thiru, head of economics at the British Chambers of Commerce, said the outlook for the public finances could be worse than the OBR suggests.

“It is encouraging that government borrowing for this financial year is now expected to be lower than in their previous forecast. However, over the next few years, the pressure on the UK’s fiscal position is likely to increase by more than the OBR is currently predicting, in the face of subdued growth and weak productivity.”

The OBR’s new forecasts suggest that net debt as share of GDP is expected to fall to 86.4% in 2018-19 from 86.5% in the current year, allowing the chancellor to meet one of his fiscal targets.