Continued scepticism at Darling's growth estimates
IoD warns Darling's Budget overestimated growth
Monday, 07, Apr 2008 12:00
Economic growth will fall to 1.7 per cent this year and continue to weaken into 2009 at 1.5 per cent, the Institute of Directors (IOD) has forecast.
The prediction will pose a headache for the chancellor Alistair Darling, as the IoD warns the worst may be yet to come.
The IoD said warned Mr Darling's predictions for the UK growth are too optimistic and so present the chancellor with "serious fiscal difficulties".
In the Budget, the chancellor said UK growth would stand between 1.75 and 2.25 per cent in 2008, 2.25 to 2.75 per cent in 2009 and 2.5 to three per cent in 2010.
IoD chief economist Graeme Leach said: "In the Budget the chancellor tweaked his GDP numbers and borrowing rose by £20 billion.
"The elephant sitting at the table is what happens to borrowing if the economy undershoots the chancellor's optimistic GDP forecasts? There is no slack whatsoever in the fiscal rules and so will the chancellor be forced to raise taxes or cut spending in the middle of a downturn?
"After 15 years of economic growth we shouldn't be boxed into this fiscal corner."
Mr Leach explained the UK economy was walking along the top of a mountain ridge, with a gentle slope and soft landing on one side and a precipitous decline, or a hard landing, on the other. In addition, the ridge is narrowing so the economy is getting closer to the edge.
"We still don't know whether the worst of the financial crisis is behind us or in front of us. We're certainly not telling our members to put on their lifejackets but it might be a good idea to remember where they are," he said.
However, while the IoD predicts a soft landing, it is still cautious as it is uncertain what the knock-on effect of a US recession could be.
"If one looks at the UK economy in isolation recession fears appear misplaced. There is an inflation constraint but in the event of a significant downturn in the economy the monetary policy committee (MPC) could ease policy and put a floor under growth," Mr Leach said.
"However, we can't look at the UK alone. Factor in the US situation and the impact of the financial crisis and the picture becomes decidedly murky. We still think a recession can be avoided but our level of confidence has fallen."