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Abu Dhabi, UAEMonday 25 June 2018

Brexit Britain slashes growth forecasts

Chancellor Philip Hammond unveiled his gloomy forecast for the UK economy in his Budget speech

Britain's Chancellor Philip Hammond poses for the media as he holds up the traditional red dispatch box, outside his official residence 11 Downing Street before delivering his annual budget speech to Parliament in London, Wednesday, Nov. 22, 2017. AP / Frank Augstein
Britain's Chancellor Philip Hammond poses for the media as he holds up the traditional red dispatch box, outside his official residence 11 Downing Street before delivering his annual budget speech to Parliament in London, Wednesday, Nov. 22, 2017. AP / Frank Augstein

The UK chancellor has given a downbeat assessment of the economy, saying that growth will slow more than expected as the country hurtles towards Brexit.

Philip Hammond revealed the deteriorating outlook in his Budget speech to Parliament on Wednesday, in which he also outlined cautious spending plans.

Britain's budget forecasters now expect gross domestic product to grow by 1.5 per cent this year, compared with a forecast of 2.0 per cent made in March, reflecting a slowdown as the Brexit vote weighs.

The Office for Budget Responsibility also cut its GDP growth forecasts in 2019 and 2020 to 1.3 per cent in both years. For 2021 and 2022, economic growth will remain weak at 1.5 and 1.6 per cent respectively.

It is the first time in a generation that growth is forecast to grow below 2% every year.

"There is a recognition from the OBR that the growth outlook is dire at a time when the world economy is enjoying a synchronised upswing. Germany is enjoying a boom and even Italy is growing faster than the UK," Daiwa Capital Markets Europe's Chris Scicluna said.

The OBR's pessimistic view on growth was based largely on a cut to its projections for productivity, the Achilles heel of Britain's economy since the global financial crisis, due to shortfalls in skills training and infrastructure.

Sterling initially fell as Mr Hammond announced the weaker forecasts for the economy, but rose later to hit a three-week high against the US dollar.

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Mr Hammond had been under pressure to use his Budget statement to turn around the fortunes of Prime Minister Theresa May. Some Conservative MPs, still smarting from an election mauling in June, had even called on Mrs May to fire him for his cautious approach to Brexit and to the public finances.

The chancellor set aside £3 billion to prepare for Brexit and offered a package of initiatives to build new homes, help first-time buyers and spend more on the heath service, but he otherwise sidestepped eye-popping initiatives.

He tried to paint an optimistic vision of a "global Britain" that would embrace the technological revolution and capitalise on the opportunities presented by leaving the EU. He also promised an approach that would be "balanced" amid pleas to end austerity.

But opposition leader Jeremy Corbyn, whose fortunes have been on the rise of late, was quick to criticise the government's plans, highlighting that many in the country are struggling.

"Our country is marked by growing inequality and injustice," he said. "We were promised, with lots of hype, a revolutionary budget. The reality is nothing has changed. People were looking for help from this budget and they've been let down."

On the Budget deficit, Mr Hammond struck a more optimistic view, saying it would fall below 2 per cent of GDP next year.

However, Britain still faces relatively high debt.

Public borrowing rose more than expected in October, driven by higher borrowing costs. Debt will peak at 86.5 per cent of GDP this year, Mr Hammond said. That compared with less than 40 per cent in 2007, the Office for National Statistics said on Tuesday.

Mr Hammond said he was sticking to the Conservatives' priority since coming to power in 2010 of fixing the public finances.

"We took over an economy with the highest budget deficit in our peacetime history," he told Parliament.

"Since then, thanks to the hard work of the British people, that deficit has been shrinking and next year will be below 2 per cent. But our debt is still too high," he said.

The Chancellor made no mention of defence in his speech. However, hidden in the small print of Wednesday’s Budget was a £100 million cut to the Foreign Office budget in 2019-2020, just as the UK is set to officially leave the EU.

Commenting on the cut, Tom Cargill, Executive Director of the British Foreign Policy Group, told The National: “If it was a decently funded department, then it would be less of a problem. But £100 million for the Foreign Office is a big deal – it works out as around an eight per cent cut to its budget.

“The fact that so-called ‘global Britain’ is going to cut eight per cent of its Foreign Office budget – in the precise year that we’re due to leave the EU – is not a huge sign of the recognition that we’re going to have to be spending more, not less, on our international engagements in the coming years.”