It’s budget time for the UK on Wednesday April 22. And as can be expected most economists are predicting nothing but bad news on the state of the UK’s public finances.
Among the key questions economists are asking: Will the government finally cut back its hugely over-optimistic growth projections?
RBC Capital understands it as the government already accounting for the success of quantitative easing. But even with that in the modelling projections are still too optimistic, they say. As they explain:
As is immediately apparent, the Treasury’s expectation of a 1.0% decline in growth this year is dwarfed by far gloomier projections across the board (e.g. -3.0% on the part of the BoE, our call for a 3.5% decline and the OECD’s modestly more pessimistic – 3.7% forecast). The government’s expectation of growth reaccelerating to 1.75% in 2010 also stands out save for the BoE’s upbeat forecast of 2.3%. The latter, however, is perhaps informed by the need to demonstrate confidence in the extraordinary measures the Bank was about to embark upon.
Hence, the considerably bleaker medium-term projections offered by the IMF and OECD (GDP seen growing by +0.2% and -0.2% respectively next year vs. our own expectations of flat). As we detail below, the government too is also caught between the opposing forces of being seen to be adopting a realistic view of the future and incorporating in its projections the likelihood the QE project will prove a success. Regardless of how the Treasury squares this particular circle, however, sizeable downward revisions to the near term growth outlook will be unavoidable, as will the concomitant upward revisions to the already troublesome borrowing projections.
So is it time for the HMT to get a reality check? The graph below certainly seems to imply so:
Related links:
Gilt auction failure begins – FT Alphaville
Darling aka Robin Hood – FT Alphaville
Darling GDP numbers – FT Alphaville