Written evidence submitted by the Institute
of Directors (IoD)
The IoD is pleased to respond to your invitation
to comment on the OBR Economic & Fiscal Outlook.
The OBR Economic & Fiscal Outlook presents
a comprehensive overview of UK economic prospects with which we
find much common ground. However, our view of UK economic growth
over the next 12 months is more subdued. The IoD forecasts GDP
growth of just 1.2% in 2011 compared with an OBR projection of
2.1%.[8]
We would highlight the following three reasons for
our more pessimistic GDP forecast:
The savings ratio might be spent
- At this stage in the economic recovery the household savings
ratio appears very low. During the early 1980s recovery the ratio
fell from 13% at the trough of the recession to 11.4% after the
first three quarters of recovery. During the early 1990s cycle
the ratio fell from 11.4% at the trough of the recession to 10.5%
after the first three quarters of recovery. In other word, there
was a wall of money still available to be spent at this stage
in the recovery. This time it's different.
Latest figures in the current cycle show the savings
ratio fell from 7.7% in 2009Q3 to 3.2% in 2010Q2. Whilst the savings
ratio could fall further, a significant reduction must be in doubt.
This message is supported by the interest rate path
in previous cycles. During the early 1980s and 1990s recoveries
interest rates fell by around 500 basis points over the first
two years of recovery,[9]
thereby boosting consumer confidence and spending. Whilst short
term interest rates are near zero, the potential "oomph"
factor to rising consumer confidence (and a falling savings ratio)
from falling interest rates is missing.
The squeeze in purchasing power
- Real purchasing power will be sharply eroded in 2011 from rising
inflation and taxation eg VAT and National Insurance hikes. Household
disposable income growth in 2011 is likely to be zero or negative
and a considerable constraint on economic recovery.
The continued legacy of the financial crisis -
We remain concerned about the continued legacy of the financial
crisis. There is very considerable evidence that post financial
crises economic recoveries tend to be more muted than standard
cyclical upswings. Whilst the financial health of PNFCs (private
non financial corporations) is strong, access to working capital
for expansion is likely to remain an issue for SMEs lacking access
to capital markets.
More generally there remain ongoing questions as
to the scale of the "funding gap" in the banking system
in 2011 and the extent to which this will inhibit growth in the
money supply.
UK broad money supply growth is anaemic and raises
serious questions as to the sustainability and strength of economic
recovery. There are numerous transmission mechanisms whereby the
output gap "half-life"[10]
could be extended in the wake of financial crises and lead to
a much more subdued upturn. These include: monetary channel, credit
channel, cost of capital, bank capital channel, wealth effects,
financial market uncertainties and exchange rate volatility effects
(see: Table 2 - Financial crises transmission mechanisms for weaker
growth, IoD Pulse, November 2010).
December 2010
8 The latest November edition of Pulse the IoD's
monthly Economic Outlook, examines the tailwinds (growth accelerating)
and headwinds (growth decelerating) on the UK economy in 2011.
www.iod.com/pulse Back
9
We acknowledge that during the early 1980s recovery the interest
rate path was irregular - down, up and then down again. Back
10
The time taken for half the output gap to close. Back
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