Chance of Negative Growth Forecasted for Next Year
Cebr is forecasting that there will be no change in interest rates until late 2012 and an outside chance of negative growth through 2011. They are also predicting that 100 billion pounds of QE will be injected into the economy. Cebr is also hanging onto its estimation that a global double dip is highly unlikely, due to the strength of emerging markets.
Cebr is taking into account the effects of the VAT for the forecast, which are planning to be implemented in January 2011. From the data forecasted, a 50 per cent chance there will be negative growth for Q1 has been calculated.
The Cebr forecasts are based in part on the effects of the Comprehensive Spending Review, announced later this week.
The report discussed the relationship between policy and economic growth, and the possible postponement of the January VAT adjustment, saying: “We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers.
“Our forecasts include an additional £100 billion in quantitative easing; base rates remaining at 0.5% till late 2012 at least and 10 year gilt yields at in the 2.5 to 2.75% range till end 2013.
“The relationship between monetary policy and economic growth is less predictable than that for fiscal policy and growth in the short term, particularly at times when the flame of economic growth is weak.
“Had a decision not already been made which is administratively difficult to reverse at short notice we would have been tempted to call for the VAT rise to 20% in January 2011 to be postponed.”
The primary author of the report, Charles Davis, commented on the report in regard to consumer confidence, saying: “All the business survey evidence suggests that despite the consumer starting to run down savings again, confidence remains weak. With the end of the recovery from restocking growth will be slow in the coming months, even without fiscal retrenchment.
“So the levers of monetary policy will be aggressively moved to fast forward again to offset the impact of the CSR in the coming years.”