New cebr forecasts for the United Kingdom economy imply that end of recession parties can be pencilled in for 26 January when the Office for National Statistics releases its fourth quarter GDP estimate. The end of de-stocking and expenditure brought forward ahead of the VAT cut reversal prompted a mini-bounce in economic activity and return to quarter-on-quarter growth in the fourth quarter.

The forecasts show the economy will return to year on year growth in the first quarter of 2010 and grow by 1.8 per cent year on year in the third quarter, as shown in figure 1 in the press release attachment. However, the end of the inventory cycle mini-bounce, uncertainty over future tax rises causing consumer caution and limited business appetite for investment in the face of still restricted bank lending will cause growth to stumble later in the year. Hence, the path for output still has the look of a saxophone, as shown in figure 2.

Looking even further out, far from the Treasury’s optimistic view on growth in 2011 and 2012, the work needed to reduce the public sector deficit will hold back the UK economy. We expect an emergency budget to take place after the general election that will knock back growth and force the Bank of England to keep monetary policy looser for longer, with rates on hold until mid 2011 and the possibility of further QE post-election.

These forecasts are based on an updated assessment for the UK economy contained in the attached United Kingdom prospects report published this week by the centre for economics and business research (cebr) – one of the country’s leading economics consultancies and respected commentators on business trends.

Charles Davis, Senior Economist at cebr, added:
‘The end of de-stocking contributed to some stronger numbers for the UK economy in Q4 2009. However, as this temporary boost to economic activity evaporates, business investment remains steady and consumers are cautious in the face of expected tax rises we think growth will head south later this year.’

Douglas McWilliams, one of the report’s authors and Chief Executive at cebr, commented:

‘We were the first to fully consider the impact of a likely major fiscal policy consolidation after the election and this is one of the most important factors in the UK economic outlook over the next few years. The Bank of England will take the current fiscal policy projections with a pinch of salt – and prepare to keep monetary policy looser for longer after the election when the concerted action on public borrowing is taken. Markets didn’t like what they saw in the PBR – a tough emergency budget will be needed and this could prompt further quantitative easing from the Bank.’