A bleak forecast: the UK in recession and base rates on hold until 2016

The Centre for Economic and Business Research (CEBR) indicated in a recent report that the UK economy is probably already in recession, with negative GDP growth in the fourth quarter of 2011 and the first quarter of 2012. The CEBR has also revised down its forecast for growth for 2012 as a whole, from 0.7% growth as predicted last October, to a decline of 0.4% with a risk of a more serious decline of 1.1% if developments in the Euro zone are especially negative.

The Centre also forecasts sluggish growth in the medium term. Growth in 2013 is forecast to be minimal at 0.9% and from 2014 onwards at around 1% per annum. Inflation is forecast to fall to 1.7% by the end of 2012 and to remain at around 2% thereafter, despite rising commodity prices and a weak pound. Unemployment is forecast to rise sharply to about 3 million in 18 months time, as companies batten down the hatches for the long term and revise their medium expectations of labour requirements.

UK base rates may remain at 0.5% until 2016, while increased quantitative easing to a total of £400 billion is expected for 2012, with the possibility of more in future years. A weak outlook is anticipated for sterling, and for the euro and the dollar, with the main weakening likely to be against the Asian currencies and the commodity based currencies.

The report’s contributors suggest that the world is going through a fundamental change where previously poor economies are industrialising fast. This is good news for them but because of the limits imposed by shortages of energy, minerals and food, some of their growth is at the expense of the more advanced economies.

The Chancellor is seen as not being able to reduce the UK deficit as quickly as he had hoped, since tax revenues will be depressed by slow growth. This does not make a case for giving up on austerity. Indeed the CEBR conclusions are that the UK debt to GDP ratio will go above 90%, meaning that the Chancellor will, at the very least, have to keep his austerity programme going for much longer than he originally forecast. Alongside the growing number of forecasts that the Bank of England Monetary Policy Committee will not raise the UK base rate from 0.5% before 2016, this reinforces a growing anticipation that UK economic growth will be slow.

If you want to find out more, or need advice about developing your business or planning your economic future, contact one of the team who will be happy to help.

© 2012 evolve wealth news team