Press Story

In his New Year message, IPPR's Chief Economist says the outlook for the UK economy in 2013 is for another year of "sluggish" growth with "uncertainty" over recovery and the Eurozone crisis continuing to dominate. He says 2012 was the year that "time stood still". He says that 2013 looks much like 2012, dubbing it "a potential groundhog year".

He argues that there is a risk that "talk of years of austerity at home and continuing crisis in Europe creates a huge amount of uncertainty, which will dampen spirits to such an extent that the economy fails to grow again".

He says that the Office for Budget Responsibility's "cautiously optimistic predictions" are based on an "unlikely" reversal in the trend for households to reduce their debt and - in the absence of an acceleration in wages - consumer spending will probably undershoot its forecasts.

He says that the Government is counting on "something just turning up" to lift the economy and argues that the Government "still does not have a path back to growth".

IPPR is calling for the Government to boost aggregate demand in the economy, invest further in infrastructure projects, establish a British Investment Bank modelled on the French one and guarantee everyone out of work for a year with a minimum wage job in a charity or local government.

IPPR Chief Economist, Tony 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. Policymakers appear to have little idea how to boost growth in the economy and are left hoping that the news will get better. 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.

"The text book solution to a lack of aggregate demand is to ease monetary policy, and if that is ineffective to ease fiscal policy too. 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."

Notes to Editors:

IPPR's recent report - A path back to growth - recommends a roadmap for growth with six elements:

1.An increase in the scale of quantitative easing
2.Fiscal measures to boost growth in the short-term combined with a reaffirmation of the plan to eliminate the deficit in the medium-term
3.Additional infrastructure spending
4.Measures to make household debt restructuring easier
5.Measures to keep the long-term unemployed in touch with the labour market
6.An active industrial policy

IPPR's report - A path back to growth - is available from: http://ippr.org/publication/55/9438/a-path-back-to-growth

IPPR's report - Investing for the future: Why we need a British Investment Bank - is available from:http://ippr.org/publication/55/9635/investing-for-the-future-why-we-need-a-british-investment-bank

IPPR North's Northern Economic Futures Commission is available here: http://www.ippr.org/publication/55/9949/northern-prosperity-is-national-prosperity-a-strategy-for-revitalising-the-uk-economy

Contacts:

Dec 22- 29: Richard Darlington, 07525 481 602, r.darlington@ippr.org

Dec 30 - Jan 1: Tim Finch, 07595 920 899, t.finch@ippr.org