Economic Outlook for 2006 and Beyond

2.61 Looking forward to the prospects for the economy in 2006, the revisions to the consensus forecasts we used in our 2005 Report have been much smaller than our revisions for 2005. The GDP growth rate is forecast to increase to 2.2 per cent in 2006, still below the 2.5 per cent anticipated at the time of our 2005 Report, but less of a shortfall than in 2005 itself. Inflation expectations are little changed and average earnings are forecast to grow more slowly than was anticipated in February 2005.

'In our medium term projections employment rises a little less quickly than the labour force, allowing for small increases in unemployment.'

NIESR, National Institute Economic Review, January 2006

2.62 The consensus forecasts anticipate that the composition of growth will shift towards exports and investment and away from household consumption spending. This could have consequences for low-paying sectors such as retail and hospitality. The National Institute of Economic and Social Research, in their latest forecast (NIESR, 2006), argue that the fall-off in productivity growth in 2005, which pushed up unit wage costs, will likely act as a spur to higher investment spending by firms. While growth in world trade is not likely to rebound back to the elevated level achieved in 2004, there are hopes of a recovery in the UK's main export markets in Europe, from the lacklustre growth that has been a factor constraining UK export growth thus far. Overall, however, world economic growth is expected to remain strong, led by China and India. And while the economy is expected to grow more slowly than trend in 2006, growth is expected to rise above trend by 2007.

Table 2.5 Independent Forecasts of Growth in GDP, Prices, Employment and Average Earnings for 2006

Source: HM Treasury (2005a, 2006).

Notes:

1. Forecasts for 2006 used in the 2005 Report were the medians taken from the HM Treasury February 2005 'Forecasts for the UK Economy'.

2. GDP is measured by ONS code ABMI.

3. RPIX is measured by ONS code CDKQ.

4. CPI is measured by ONS code CJYR.

5. Average earnings are measured by AEI including bonuses for GB using ONS code LNNC.

6. Employment is defined by workforce jobs and is measured by ONS code DYDC.