Treasury forecasts – recession – it will all be over by Christmas

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The lights may be going out all over Europe, according to the IMF but as for the UK recession, it will all be over by Christmas, according to the Treasury. The Chancellor predicted the economy would shrink by 3.5 pc this year but growth will resume towards the end of the year, with 1.25 pc growth pencilled in for 2010 and a staggering 3.5 pc growth sketched in from 2011 onwards. The economy will bounce back quickly above the trend rate of growth.

Unfortunately the kill joys at the IMF choose to release their own forecasts for the UK and world economy this week which contradicted the rosy Treasury scenario. According to the IMF, UK growth is expected to fall by 4.1% in 2009 and continue to fall by -0.4% into 2010.

No bounce back is assumed for the UK or world recovery. The IMF warn of the most severe recession since World War II. The global economy is expected to shrink by 1.3% in 2009 with a slow recovery expected in 2010 and no growth in the so-called “Advanced Economies”.

The Chancellor’s forecasts have met with little accord and much disbelief amongst economists and analysts. The Ernst and Young ITEM club is the only forecasting institution using the Treasury model, probably with good reason. In the Spring 2009 outlook, ITEM club forecast the economy would shrink by 3.5% in 2009 and by a further -0.1% in 2010. Growth in 2011 would be just 1.8%.

Chancellor Darling has denied over optimism in the Budget but cynics suggested the prediction enabled the Treasury to make calculations about public spending that will prove unsustainable if the economy performs worse than forecast.

Even with the unrealistic growth forecasts the borrowing and debt situation is pretty bad. Debt is scheduled to rise to over 75% of GDP with borrowing forecasts of £175 billion this year and £173 billion next. That's 12.4% of GDP this year and a total of £700 billion over the five year forecast period.

IMF – Economic Outlook    ITEM Club Forecast  HM Treasury Budget

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