Economic forecast for 2010
19 January 2010
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The FPB's economics adviser, Professor Phil Whyman, takes a look ahead at what to expect from the UK's economy in 2010. 

There is little need to remind ourselves that we have just lived through five quarters of falling Gross Domestic Product (GDP), making it the longest recession on record (since 1955) and the deepest since the second world war.
 
Excessive risk taking, together with exuberance in financial and property markets, had a painful effect upon the real economy. The experience would have been considerably worse had governments not taken the edge off through semi co-ordinated stimulus packages. Nevertheless, the effects generated by this intervention will have painful medium-term consequences for any whose livelihoods depend upon this sector of the economy.
 
Preparing for growth
 
The general consensus among economic forecasters is that the UK economy will return to growth in the first half of 2010, slowly accelerating thereafter to deliver a growth rate between 0.9% and 1.5%.
 
The CBI and IMF err towards the lower end of this spectrum, whilst the Treasury forecasts 1-1.5%. I agree with these judgements, estimating growth of perhaps 0.8-0.9%. Recovery will be slow, due to faltering in international markets, with the recovery in the export-orientated economies of Japan and Germany looking fragile. This will  prevent the depreciation in sterling delivering the significant stimulus to British trade that might be expected in a 'normal' period.
 
Economic predictions
 
Weaknesses remain within the UK economy including the disproportionate size of the financial sector, property remaining over-priced, and credit-based consumption remaining too high relative to savings. This will require continued over-reliance upon international borrowing, alongside the need for a tighter system of financial regulation.
 
Forecasts predict that inflation will rise to between 1.75% and 1.9%, on the Consumer Price Index (EU-wide), and 2.9% on the Retail Price Index, due in large part to the rise in oil prices and end of the VAT cut.
 
I am a little surprised by the magnitude of these predictions, given that the economy is likely to remain sluggish throughout the year, and the labour market remain slack. Therefore my own prediction would be for inflation to rise to only 1.5%.
 
Unemployment is predicted to rise to between 1.75 million and 1.9 million, which is a significant achievement, if this is accurate, because this is significantly below levels experienced during the early and mid-1980s, with a shorter and shallower recession as trigger. Active labour market policy could help to reduce this more quickly, and provide the highly trained workforce that businesses require going forward into future growth years.
 
The public sector borrowing requirement is high, at 12.6% of GDP, and expected to remain so for at least one parliament. Future economic growth will reduce the deficit significantly, as it has in the past. You've only to look at what happened during the late-1980s to see how quickly things can turn around. Yet, this still leaves large reductions in spending and/or rises in taxation, over time, to restore balance.
 
Consequently, businesses working with, or supplying to, the public sector will find this a difficult trading period.
 
However, the great uncertainty in these predictions comes from the forthcoming general election, and the sharp disagreement over the speed at which the budget deficit will be reduced. The election result will, inevitably, impact upon growth, inflation and unemployment.
 
The argument is between those who believe that this has to be cut quickly, and that in doing so the financial markets will 'reward' the nation with lower long term interest rates, against those who believe that the recovery is fragile and that a sudden withdrawal of the stimulus would effect confidence and set back the recovery.
 
Election uncertainty aside, since this is the first time since I've been writing these articles for the FPB that I've been able to share some positive economic predictions with you, may I take this opportunity to wish all of you a happy and fulfilling 2010!
 
 
About the author
 
Phil Whyman is Professor of Economics at the University of Central Lancashire and an adviser to the FPB. Professor Whyman teaches Economic Theory and Economic Policy and also undertakes research and consultancy for government, corporations and charitable bodies, advising on various aspects of economic policy.


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