£100bn spending and EU deal fuel optimism

TWO of the world’s largest banks have redrafted their economic forecasts amid expectations a new political momentum will lift Britain from the doldrums.

The optimistic breeze blowing through financial and economic circles has identified Boris Johnson’s £100billion infrastructure spending plan and the possibility of a good UK-European Union trade deal as reasons to be cheerful.

The Bank of England has also aired the possibility of an interest rate cut.

Back in the autumn, with Parliament deadlocked and the prospect of ongoing political uncertainty, HSBC and JP Morgan cut their 1.2 per cent 2020 growth forecasts to just 1 per cent.

But, according to the independent research group Consensus Forecasts, they have since raised their predictions to 1.1 per cent.

Howard Archer, chief economist of the independent ITEM forecasting club, which uses the Treasury’s own computer model of the economy, has also raised his growth forecast for 2020, from 1 per cent to 1.2 per cent – above last week’s consensus of 1.1 per cent.

The year-on-year figure for the fourth quarter of this year is predicted to be even higher, at 1.5 per cent, and for next year Archer is looking for 1.7 per cent.

He said: ‘Some of the recent uncertainty has been diluted by the Election result and the inevitability of Britain leaving the European Union on January 31.’

Professor Peter Spencer, of York University’s economics department, said: ‘If Britain can get a trade deal with the European Union, and there is no reason we shouldn’t, then the picture starts to look pretty good.

‘Once an agreement is signed, a lot starts to kick in and decisions that have been put on hold start to be made, such as in the car industry. There is a lot of pent-up demand, a dam behind which is a huge head of water.’

He added: ‘It is hard to predict the precise timing and impact on growth, but if the forecasts for this year were proved to be out by two percentage points, it is almost certain that growth would be two percentage points higher than forecast rather than lower.’

Other upbeat forecasters include Liverpool Macroeconomic Research, which is looking for 2 per cent growth this year, and Beacon Economics, which has forecast 1.7 per cent.

Despite the uptick in forecasts for the year, a clutch of economic figures this week is expected to paint an uninspiring picture.

The numbers, which relate to the end of 2019, will reflect the preElection mood rather than future forecasts.

They include gross domestic product in November and UK trade in the three months to November, both due tomorrow and December retail sales, due on Friday.

But Trevor Williams, independent economist and visiting professor at Derby University, said there are ‘reasons to be hopeful’. He explained: ‘Higher public spending can help if it is focused on improving productivity.

‘The emphasis needs to be on those areas which can make a real difference here.

‘They include bio-science, artificial intelligence, engineering and agriculture.’

Williams added that necessary public investment should be targeted at those communities in the North and Midlands that have missed out.

He said: ‘What do they need in terms of public investment?

‘Better education, to raise skills; better health services, which reduce time off sick, and better transport.

‘If the Government can get this sort of investment right, there are good reasons to be optimistic.’

Peter Dixon, global financial analyst at Commerzbank, said any interest rate cut to 0.5 per cent could further stimulate the economy.

December figures for the Consumer Prices Index are due on Wednesday.

Dixon said: ‘Inflation is likely to be running at 1.8 per cent annually, below the Bank of England’s 2 per cent target.

‘That opens the door to a possible rate cut.’