The Office of Budget Responsibility (OBR) the UK’s official economic forecaster has admitted that it did not predict the double-dip recession because it failed to see that the trade in exports and consumer spending would be as weak as it has been in the past 18 months.
The OBR was created as an independent body, separate from government, by George Osborne when the coalition came to power in May 2010. Its aim is to ensure that the government’s economic policies are based on realistic and transparent independent forecasts for GDP growth and the public finances. Previously, policies were based on the Treasury’s own forecasts. Critics say that these can be vulnerable to political interference.
The OBR defended itself against accusations that its forecasts are influenced by the government.
The report said: “We are producing forecasts on the basis of our best professional judgment. It’s not affected by the politically motivated wishful thinking of any description.
“People are bound to disagree and have wildly differing views on what’s going wrong and what the explanations are.”
The OBR said that a combination of high inflation, focusing on deficit reduction and weak global demand, especially from the eurozone were the main reasons for the UK falling back into recession in the first quarter of 2012.
The chairman of the OBR, Robert Chote said that it was difficult to explain just why the UK economy has fared so poorly over the last two years.
His report concluded that “Growth [was] over-estimated thanks to stubborn inflation hitting consumption and export markets hitting net trade. Investment [was] hit by credit conditions and weak confidence in demand and government spending less negative than expected.”
Mr Chote said: He said: “We can’t exclude the possibility that fiscal consolidation has hit growth harder than thought, but that said, stubborn inflation seems to be a better explanation for weak real consumption.
“Export markets may be a better explanation for the recent very substantial hit to net trade during the double dip. It’s then hard to distinguish the impact of the consolidation for example on business investment, from the impact of other expectations about future demand; about conditions in the eurozone; what’s going on in the financial sector.”
The OBR’s own figures show that its forecasts have been less reliable than those produced by the Treasury over the past 20 years.
The OBR said that the UK economy would grow by 5.7 per cent between the first quarter of 2010 and the second quarter of 2012. However, according to the ONS, the economy grew by just 0.5 per cent in that period.
A spokesman for the Treasury said: “The analysis from the independent Office for Budget Responsibility confirms their judgement that the reason growth in the British economy is weaker than they had forecast is to do with 'unexpectedly stubborn inflation’ and 'deteriorating export markets’.”