Future prospects

Our main scenario sees UK economic growth slowing from around 3.1% in 2007 to around 1.75% in 2008 as the effects of past interest rate rises, reduced credit availability, tighter fiscal policy and the US and Euroland slowdown feed through. A modest recovery to growth of around 2% is projected for 2009 due to the effect of recent and expected future interest rate cuts (both in the UK and elsewhere).

As shown in Table 1.1, our main scenario is similar to the latest average independent forecast and just below the bottom end of the Treasury’s forecast range from the Pre-Budget Report. We would expect the latter to be revised down slightly in the Budget, which is also likely to see increased Treasury public borrowing forecasts (although any consequent tax increases seem likely to be postponed until the economy is in a healthier state).

Table 1.1 – Summary of UK economic prospects

Indicator (% change on previous year)	HM Treasury forecasts (Oct 2007)		Independent forecasts (Feb 2008)		PwC Main scenario (Mar 2008)
	2008	2009	2007	2008	2008	2009
GDP	2 to 2.5	2 to 2.5	1.8	2.0	1.75	2
Consumer spending	1.75 to 2.25	1.75 to 2.25	1.7	1.8	1.75	1.5
Investment	3.25 to 3.75	3.25 to 3.75	2.5	1.9	1.75	2
Manufacturing output	1.5 to 2	1.5 to 2	0.2	0.7	0.5	1
CPI (Q4)	2	2	2.2	2.0	2.25	2

Source: HM Treasury, Survey of Independent Forecasts (average values), PwC scenarios rounded to the nearest quarter of a percent. Investment refers to total fixed investment.

Both our main scenario and the projections of other forecasters are subject to significant margins of uncertainty, as indicated by the alternative GDP growth scenarios shown in Figure 1.2. At present, risks to our main scenario for growth appear to be biased to the downside and we would recommend that businesses should stress their plans against the downturn scenario shown in Figure 1.2, which envisages a mild technical recession later this year. This is not the most likely scenario, but it certainly cannot be ruled out.

Figure 1.2 Alternative UK GDP growth scenarios

Consumer spending growth is expected to moderate from around 3% in 2007 to around 1.5-1.75% in 2008-9 in our main scenario. This reflects the dampening effect on household discretionary spending power of slow real disposable income growth and high household debt levels. If the housing market slows sharply over the next year, which is clearly possible (and rather more likely than in our last report in November), this would tend to reduce consumer spending growth further through confidence, collateral and wealth effects.

Business investment growth is also likely to slow in our main scenario, reflecting both slower expected future demand growth and the influence of tighter credit conditions. In contrast to the 2001-3 period, when the effects of a global economic slowdown on the UK were offset by increased government spending, slower private sector demand growth in 2008-9 will be reinforced by decelerating public spending growth given the weak state of the public finances at present. Net exports are projected to make a broadly neutral contribution to GDP growth in 2008-9 in our main scenario, with the boost from the recent fall in the pound being offset by slower growth in the UK’s key export markets in Euroland and the US. Although China and India will continue to grow rapidly, their share of UK exports remains modest for now.

Our main scenario for UK GDP growth would be consistent with inflation (CPI) rising in the short term, but then falling back to around its 2% target rate on average in 2009. In this case, official short-term interest rates should be able to be cut back to just below 5% over the next six months, but are then assumed to remain on hold in our main scenario. If the downturn scenario appeared to be materialising, however, then interest rates could be cut much further and faster in response.