OBR expects slower-paced recovery

The independent Office for Budget Responsibility (OBR) updated its forecasts for UK economic growth at the end of November. Although the economy is expected to continue its expansion, the OBR expects the recovery to be a “slower pace than in the recoveries of the 1970s, 1980s and 1990s”.

It also expects the economy to grow by 1.8% this year and 2.1% next year, warning that government spending cuts are likely to make growth “sluggish” over the medium term. In comparison, the Organisation for Economic Cooperation & Development expects the UK economy to expand by 1.8% this year and by 1.7% in 2011. The economy expanded by 0.8% during the third quarter of 2010.

Minutes from the Monetary Policy Committee’s November meeting showed continuing divisions between policymakers, with one calling for an increase in interest rates while another voted for further quantitative easing. Inflation remained well above the Bank of England’s 2% target, reaching 3.2% during October. According to a recent Inflation Report, the Bank believes inflation will remain high during 2011, but expects it to move below 2% by 2013.

The rate of unemployment remained high, falling only slightly over the third quarter to reach 7.7%. The OBR expects unemployment to peak at just over 8% of the labour force during 2011. Retail sales increased during October, month on month – up 0.5% and boosted by activity at non-food stores – although they still fell 0.1% year on year. Sales are likely to rise before 2010 ends, as shoppers seek to beat January’s rise in VAT. According to the Nationwide Building Society, consumer confidence plumbed its lowest depths since March 2009 during October, and consumers appear increasingly pessimistic about prospects for their household income.

Demand for bond funds remained strong among UK investors during October, according to recent data released by the Investment Management Association (IMA). Bonds retained the top spot as the most popular asset class for a fourth month, although Global Bonds was knocked off its position as the best-selling IMA sector by Global Emerging Markets, ranking instead as the third most popular sector during October.

Nevertheless, all IMA bond sectors were in favour during the month – Global Bonds, Steling Strategic Bond and Sterling Corporate Bond led the field while the Gilt and High Yield sectors also experienced net inflows. That said, the attractions of pan-European corporate bonds are likely to have been adversely affected by concerns over the ongoing debt crisis in Europe.