With all the talk about increasing signs of economic “green shoots” in recent months, it was perhaps too easy to suddenly relax and think that the good times are just around the corner.
The OECD’s Economic Outlook published this week provided a much more sober picture of recovery prospects and was a reminder of where we are and what we should or shouldn’t expect over the next years.The report says that the global recession is close to bottoming out, but recovery prospects are weak. Whilst strong policy responses helped to prevent an even worse economic outcome, the world economy should not expect to get back to business as usual once the recession ends. The wounds inflicted by the crisis will take a long time to heal.
For the UK, the OECD's 2009 forecast is weaker (-4.3%) than in its last outlook in March, when it predicted GDP to shrink by 3.7%, but it is marginally more upbeat about 2010, seeing output stagnating rather than contracting by 0.2%.
Near-term prospects aside, the report draws attention to the longer-term outlook, arguing that the pace at which advanced economies, including the UK will be able to grow over the next decade has been hit, which will limit the potential for a fall in unemployment without inflation and a swift recovery of sharply deteriorating public finances. For the advanced economies together, the OECD estimates that annual potential output growth was 2.1% before the crisis; this will fall back to 1.4% in 2009 and 2010 and recover to only 1.7% between 2011 and 2017.
For the UK this is particularly worrisome. The OECD says that Britain's fiscal position is far weaker than many of its peers, following many years of government’s spending splurge. The fiscal deficit next year is forecast to jump to 14% of GDP - higher than anywhere else in the OECD. This figure could even climb higher if more money had to be poured into the financial system.
To preserve fiscal stability, the UK government will have to “develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold”. What is the implication for UK construction?
Nothing really new. This blog has now for a while discussed the threat to public capital spending cuts in the near future. Just a reminder – since the Budget back in April we know that the current government plans to cut net capital investment by half from £44bn this year to £22bn a year by 2013/14. No matter what government will be in place from mid-next year, we already know that this will have severe implications for the construction industry in the areas of education, health, transport and housing.
What the OECD report reiterates is that it could take much longer for public finances to be brought back in order, which makes a bad picture for government construction spending even bleaker.