1: Growth is slowing

The Office for Budget Responsibility (OBR) was over-optimistic about growth for 2011 and 2012. But then it was too pessimistic about last year, when it forecast in the 2013 budget that growth would be just 0.6%, as the chart below shows. This year the UK economy enjoyed a strong first-half but has lost some steam in the second half on 2014. The International Monetary Fund (IMF) sees growth slowing down further next year.

Economists widely expect this year’s growth forecast from the OBR to be revised higher but they are less certain about future years.

Martin Beck, senior economic adviser to thinktank the EY ITEM Club, comments:

The chances of any revisions to the forecasts for future years are a lot lower. Though the recent performance of the UK economy has exceeded expectations, we are increasingly seeing signs that the momentum is cooling. This is because while the domestic economy appears still to be firing on all cylinders, the external outlook has become less supportive.

While prospects for the US economy have improved through 2014, the boost from this source has been offset by renewed weakness in the eurozone, the UK’s biggest export market. And with geopolitical risks also increasing, it looks unlikely that the OBR will move from its long-held view that 2015 will see slower growth.

2: But the UK is outpacing other advanced economies

The UK looks on track to outpace other advanced economies this year and Osborne is almost certain to highlight that the likes of the IMF and Organisation for Economic Co-operation and Development (OECD) put the UK out in front in their forecasts.
The numbers for 2014 so far suggest the forecasters are right, as the chart below shows.

Howard Archer, economist at IHS Global Insight, predicts:

Mr Osborne will be able to say with some confidence that UK GDP has increased by 3% in 2014, the first time it has achieved this since 2006. This will likely be more than three times the expected growth rate in the eurozone in 2014 and will make the UK the fastest-growing G7 economy.

3: Unemployment has surprised the forecasters

Unemployment has fallen faster than most forecasters were expecting. The OBR forecast at this year’s Budget in March that unemployment this year would fall to 6.8% in 2014. The most recent data put it at 6% for July to September 2014.

4: So why are people feeling worse off?

Unemployment is down and the economy is recovering from recession and yet many people feel worse off. The problem for many workers is that much of the rise in employment has been in low-paid roles and people have taken part-time jobs or set up as self-employed. Overall, wage growth has been slow and has failed to outpace inflation, meaning pay packets have been falling in real terms for years, as seen in the chart below.

This jobs market trend also affects the public finances where income tax revenue has taken a hit.

Inflation has now fallen below the Bank of England’s 2% target and there have been tentative signs that wage growth is picking up. The OBR will publish new forecasts for inflation and wage growth alongside the chancellor’s autumn statement. But with this and with GDP forecasts, it is important to remember the population has been growing and that in per capita terms things will not look so rosey. Hence why many people may continue to feel worse off.

5: Has austerity improved the public finances?

And now for the really bad news. Despite sweeping austerity since the coalition came to power, and a backdrop of economic growth, the chancellor is on course to miss his deficit-reduction targets this year.

When George Osborne got the keys to No 11 Downing Street in 2010, he vowed to restore the UK’s economic credibility by cutting the deficit and protecting the nation’s prized AAA-credit rating. As the chart below shows, the deficit has been coming down – but at a much slower pace than Osborne expected in 2010. At the time of the emergency budget in June that year, borrowing was expected to come in just under £40bn this year. By the time of the budget in March this year, that forecast had been more than doubled, to about £87bn.

The reality is that the OBR is likely to revise up that forecast again in the autumn statement on Wednesday, largely because the Treasury’s tax take has been much weaker than expected amid weak wage growth. Borrowing in the first seven months of the fiscal year – April to October – was £64.1bn. Economists believe a small miracle would be needed for borrowing to come in below £87bn this year.

With Osborne behind in his deficit-reduction plans, room for pre-election giveaways is limited, with more spending cuts and tax rises likely to be announced further down the line.

As for Britain’s AAA status? The UK was stripped of its treasured rating last year by two out of three of the main credit-rating agencies.

Rob Wood, chief UK economist at the bank Berenberg, explains what this means for the future:

Rather than falling, the deficit has risen so far this year as income tax has disappointed ... Back in 2010 the chancellor was planning for austerity to be almost over by now, with borrowing down to under £40bn a year and the structural deficit all but eliminated. But the spending restraint will now have to continue for probably all of the next parliament.

What this means for the autumn statement is clear, he adds:

Whatever Osborne gives, he will have to take away with the other hand.

6: Whatever became of the “march of the makers”?

In his 2011 budget, Osborne called for a “march of the makers”, promising help for manufacturers and a rebalancing of the economy away from over-reliance on domestic, consumer demand. The manufacturers’ organisation EEF says the sector will grow faster than the overall UK economic this year. But it has a lot of ground to make up. As things stand, only the dominant services sector has recovered from recession to surpass its pre-crisis peak, as this chart shows.