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IPPR predicts "groundhog year" for 2013

The economy will be “sluggish” and “uncertain” according to think tank IPPR, who predicted a groundhog year for 2013.

IPPR’s chief economist, Tony Dolphin’s New Year message was not one of optimism and cheer, as he set out predictions that looked much the same as 2012.

The think tank urged the Government to push aggregate demand in the economy and boost investment in infrastructure while establishing an investment bank model similar to that used in France.

IPPR said using a French investment model would guarantee minimum wage jobs to all those out of work for more than 12 months within a charity or local government.

They also warned of continued austerity in the next 12 months, while much will depend on employment figures and consumer spending.

Mr Dolphin said: “A year ago I argued that: ‘economic policy has become a matter of hoping that something turns up – and that is why, for the UK economy, 2012 is unlikely to be a happy new year’.

“Thinking about prospects for 2013, it seems that time has stood still for the last twelve months and the same conclusion still holds. The risk is that 2013 could be groundhog year for the UK economy. The latest forecasts suggest growth in 2013 will be weak, but better than in 2012, and that unemployment will rise. The risk is that they are too optimistic about growth, but that – unlike in 2012 – they are right about unemployment.

“The biggest problem facing the UK economy is a shortage of aggregate demand. Consumer spending is increasing at a sub-par rate because wages are growing less rapidly than prices and households are choosing to reduce their debts. Export growth has tailed off badly because the UK’s main market – Europe – is back in recession. The government is cutting its spending on goods and services. And businesses, although in aggregate they are sitting on large cash piles, are reluctant to spend until they see more demand for their products.

“Monetary policy has certainly been eased in the UK, although it has proved impossible to encourage banks to lend enough while they are focused on rebuilding their reserves. Fiscal policy is, however, not being eased; it is being tightened, taking demand out of the economy, because the government remains committed to deficit reduction. As an alternative, it has come up with a number of schemes to increase lending to the private sector, most recently ‘Funding for Lending’ and a ‘British Business Bank’. At the margin, these will probably be positive for growth, but they will not on their own turn the economy around.

“Growth therefore depends on something turning up. This is literally true in the case of the latest forecast from the Office for Budget Responsibility (OBR), which sees growth of 1.2% in 2013, followed by 2.0% in 2014 – in line with the consensus. In the absence of strong real wage growth, the OBR’s forecast for consumer spending, and therefore for real GDP, requires an increase in household debt, commencing in the middle of 2013. This would be a significant change from the trend of the last four years, and is very unlikely.

“How this plays out politically will depend to some extent on what happens to unemployment. In 2012, the double-dip recession did less damage to the credibility of government economic policy than it might have done because employment increased and unemployment fell by more than expected. Few economists expect the government’s luck in this regard to hold.

“The best way to describe the outlook for the UK economy is ‘uncertain’. Unfortunately, uncertainty is not just a useful description; it is a key determinant of the outlook. The risk in 2013 is that all the talk of years of austerity at home and continuing crisis in Europe creates a huge amount of uncertainty, which will dampen animal spirits to such an extent that the economy fails to grow again.”

This was posted in Bdaily's Members' News section by Miranda Dobson .