The Budget: Growth forecast raised: Economic Outlook

THE TREASURY lifted its forecast of economic growth this year to 1.25 per cent in the Budget yesterday, undeterred by its record of persistent over-optimism in judging the strength of the economy in the past three years.

The Treasury stuck by its Autumn Statement forecast that underlying inflation would end the year around 3.75 per cent, below the Chancellor's 4 per cent target ceiling. The Budget measures are expected to increase underlying prices - excluding mortgage interest payments - by 0.25 per cent this year, and by 0.5 per cent by the middle of 1994.

The fall in the pound since Black Wednesday has made the Treasury more pessimistic about Britain's trade gap. It expects a pounds 17.5bn current account deficit this year, compared to the pounds 15.5bn Autumn Statement forecast. The current account deficit is expected to widen further early next year.

The Treasury was quick to emphasise that its forecast for the strength of recovery was in line with the average view of the 'seven wise men' appointed to provide the Chancellor with independent advice on the economy. The Chancellor said the current level of interest rates was consistent with his recovery forecast, although some of the wise men recommend further cuts.

The forecast for growth in national output is slightly higher than the 1 per cent growth predicted in the Autumn Statement. The Treasury said the upward revision - well within the usual margin of error in economic forecasts - was due to the strength of the economy late in 1992.

Growth in the year to the second half of 1993 is forecast to be 1.75 per cent, rising to 3 per cent in the year to the first half of 1994. This implies that the Treasury expects recovery through this year to be no quicker than it thought in the Autumn Statement, notwithstanding the better-than-expected performance late last year.

Excluding North Sea Oil production, growth is expected to be 2.25 per cent in the year to 1994. The non-oil economy needs to grow by at least 2 per cent to bring about significant reductions in unemployment. This suggests that the jobless total is expected to continue rising for many months. Figures will show tomorrow that the seasonally adjusted unemployment total has topped 3 million for the first time in six years.

Recovery this year is expected to be fuelled by a 1.25 per cent rise in consumer spending and a 5.5 per cent rise in exports, helped by the gains to international competitiveness provided by sterling's devaluation. This boost for British companies also means that manufacturing industry is likely to recover slightly more quickly than the economy as a whole.

The Treasury warned that consumer spending would be restrained by the desire to pay back debt and fear of unemployment. But it also forecast that housing turnover and house prices 'may start to rise during the year', helping consumer confidence. The proportion of income people choose to save is also expected to fall slightly in the next 18 months.

Investment is forecast to rise 0.5 per cent this year, a slightly more bullish outlook than the Autumn Statement prediction, despite the belief of the seven wise men that investment is more likely to fall.

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