The new, independent Office for Budget Responsibility (OBR), created by Britain’s recently installed coalition government, published its first forecasts on Monday. The group’s GDP forecasts were less optimistic than the ones published in March by the treasury under the previous government. The OBR expects the UK to grow by 1.3% this year and between 2.6% and 2.8% in 2011-14. (The EIU expects significantly slower growth, with a rise of 0.8% this year and between 1.1% and 1.6% over the following four years.)
Despite these more downbeat economic expectations, sterling rallied in response to another aspect of the OBR’s report; a lower-than-expected deficit. Thanks to higher-than-expected tax receipts, the UK’s deficit is forecast to reach 10.5% of GDP this year, down from a previous forecast for 11.1%. Although more manageable, this remains a daunting figure. The measures taken to address it, to be announced in an emergency budget on June 22nd, will be closely scrutinised.