Spring Statement: OBR Revises Up GDP; Inflation To Fall To 2%

In Chancellor Philip Hammond's first Spring Statement, replacing the usual Budget which will now be held in the autumn, it was confirmed GDP growth for 2017 was 1.7% on the back of stronger-than-expected productivity growth, beating the 1.5% forecast in the Autumn budget. 

Autumn Budget 2017: OBR significantly cuts UK growth forecasts; Hammond sets aside further £3bn for Brexit

In November, the GDP growth forecast for the next five years, up to and including 2022, was 1.4%, 1.3%, 1.3%, 1.5% and 1.6% respectively.

These have been revised to 1.5% in 2018, 1.3% in 2019 and 2020, 1.4% in 2021 and 1.5% in 2022. 

GDP is expected to grow faster in 2018, Hammond said, adding "we did it in 2017 and we should make it our business to do it again." However the revisions indicate growth will slow in 2021 and 2022. 

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The OBR also forecast that CPI inflation, which stands at 3%, would fall back to its 2% target by the end of 2018. 

Borrowing for the 2017/18 fiscal year was revised down by £4.7bn to £45.2bn, Hammond said, adding "there is light at the end of the tunnel."

The new forecasts for net borrowing as a percentage of GDP are 1.8% for 2018/19, 1.6% for 2019/20, 1.3% for 2020/21, 1.1% for 2021/22 and 0.9% for 2022/23.

For 2018/19 there will be a small surplus in day-to-day spending with debt to peak at 85.6% this year before falling to 77.9% in 2022/23. The debt forecast is 1% lower than in November.

Looking at employment, Hammond said he expected to see 500,000 more people in work by 2022. 

"We are building a Britain fit for the future and an economy that works for everyone," Hammond said.

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The Chancellor talked up "substantial progress" on the Brexit talks so far and said he looks forward to "another important step forward next week at the European Council", when negotiating teams meet.

Hammond added the Treasury will today publish information about how the £1.5bn set aside for Brexit planning will be spent.

He did not acknowledge the OECD report, published earlier today, which said of the UK economy: "High inflation continues to damp real household income growth and consumer spending, and business investment is slowing, amidst continued uncertainty about the future relationship between the UK and the EU". 

Hetal Mehta, senior European economist at Legal & General Investment Management, said: "After significant downgrades to growth and upward revisions to borrowing requirements just in November, the OBR has now revised up growth (for the near term) and taken down the borrowing forecasts over the next five years.

"That said we do not expect Hammond to go on a spending splurge in the Autumn Budget. He will likely save the extra room for manoeuvre ahead of the next election and to cushion any downside risks emerging from the UK's departure from the EU." 

Russ Mould, investment director at AJ Bell, said: "Even if the stock market looks to be shrugging, the debt markets look to be pleased, judging by how the yield on the 10-year gilt, or government bond, has fallen back below 1.50% today, well below February's 1.65% high.

"The OBR's minor cuts to its estimates for inflation for 2018-19 and 2019-20, to 1.8% and 1.9%, may help a little on this front, too, also giving the Bank of England breathing space when it comes to its latest interest rate decision next Thursday. 

"All of this helps anyone with a mortgage, at least indirectly, so neither the Chancellor's long-term debt-reduction policy nor his statement today should be taken lightly."

Ian Stewart, chief economist at Deloitte, said: "These forecasts put the UK in a better position to face the moment of truth on Brexit. The decision phase of the Brexit talks will shortly be upon us. Stronger public finances give Hammond more firepower to support the economy if the Brexit talks don't go according to plan.

"We should not get carried away. These forecasts are likely to be no less fallible than earlier ones and, despite an improving trend in public borrowing, the burden of debt in the UK is still at its highest in over 50 years."