The latest PricewaterhouseCoopers (PwC) UK Economic Outlook shows modest average growth of around 0.5% in 2010. Destocking made a major contribution to the very sharp fall in GDP in Q4 2008 and Q1 2009 and the reversal of this stock adjustment could lead to quarterly GDP growth becoming positive again before the end of 2009. But there is a risk of a temporary relapse into negative growth in early 2010 due to the rise in VAT back to 17.5% from 1 January 2010.
Consumer spending is forecast to fall, by around 3.5% this year in real terms, due to the squeeze on household finances from high debt levels, tight credit conditions, falling housing wealth and rising unemployment. A further but much smaller real decline in consumer spending is expected in 2010, with only a gradual recovery thereafter as households seek to reduce their debt burdens and return their savings ratios to more normal levels.
Public spending growth will remain positive in real terms in 2009 and 2010, but will need to be cut back in the medium term to bring under control a budget deficit that is projected to rise to over 12% of GDP in 2009/10 and remain around that level in 2010/11. The report suggests that significant tax rises are also likely to be needed from 2011 onwards, over and above what the government has already announced.
In total, the report indicates the need for a cumulative fiscal tightening rising to around 10% of GDP over the next decade in order to restore the current budget to balance and prepare for the fiscal costs of an ageing population. This would equate to a fiscal squeeze of over £140 billion per annum at today’s values, or over £5,000 per UK household on average.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP, said that: “Future governments may face the temptation to relax the monetary policy regime (for example by raising the inflation target) so as to ‘inflate away’ part of the massive public debt that is building up. But this would be likely to be self-defeating in the longer term and, to guard against any such temptation, we would recommend that all major political parties should commit clearly and unambiguously in their manifestos for the next general election not to make any such changes to the UK monetary policy regime.”
