Watchdog cuts 2011 growth forecast

Pedestians walk past a building under construction in central London June 14, 2010.

LONDON (Reuters) - The fiscal watchdog cut its growth forecasts on Monday because of a continued credit crunch and the painful effects of the government's austerity drive, but economists said its estimates were still too optimistic.

Despite warning that recovery would be the weakest from any recession since World War Two, the independent Office for Budget Responsibility said the Conservative-Liberal Democrat coalition's deficit reduction plan had a 70 percent chance of success, higher than its last forecasts in June.

The coalition government, in power since May, is attempting to all but eliminate a budget deficit of about 10 percent of national output before the next general election due in 2015.

Some economists and opposition politicians argue such a rate of consolidation poses a serious risk to economic recovery but, while the OBR expects very sluggish growth at the start of next year, the watchdog said a return to recession was not on the cards.

"All of this should hopefully reassure the markets that the UK has its fiscal problems under control and is not about to go the way of Ireland or Greece," said Vicky Redwood at Capital Economics.

"But the big picture remains the same ... Not only are the OBR's growth forecasts still optimistic, but there are big question marks over whether the cuts in spending built into the projections can actually be achieved."

The OBR also now estimates that 330,000 jobs will be lost in the public sector, down from its forecast in June of 490,000 job cuts, following the government's October spending review which had less grave implications for state-employed workers.

"The bulk of this revision results from the action we have taken to cut welfare bills rather than cut public services," finance minister George Osborne told parliament. "And the OBR forecast is that private sector job creation will far outweigh the reduction in public sector employment."

However, the watchdog is concerned about a continued dearth of credit in the economy. Hopes for an export-led recovery could also dwindle given Europe's ongoing sovereign debt crisis and wider risks to the global economy.

SLOW RECOVERY

While Britain took three years to recover from previous recessions in the 1980s and 1990s, this time it will take four years, the OBR said.

As expected, it raised its 2010 growth forecast to 1.8 percent, from its 1.2 percent forecast in June, to factor in a surprisingly strong performance in the middle of the year.

Still, it attributed that to temporary factors such as unsustainable construction activity and firms rebuilding stocks.

It cut its 2011 forecast to 2.1 percent from 2.3 percent and its estimate for 2012 to 2.6 percent from 2.8 percent.

"It would be unprecedented in the post-war period for economic growth to not exceed 3 percent in a calendar year during the recovery phase of the economic cycle," the OBR said.

The watchdog's forecasts did not take account of the rescue package announced on Sunday for Ireland, Britain's fifth-largest export market, because the deal had yet to be finalised when the OBR completed its latest report.

The OBR sees Britain's budget deficit as a percentage of gross domestic product at 10.0 percent this fiscal year and then falling to 1.9 percent in 2014/15, slightly lower than in its June forecast.

The watchdog shaved its estimate for public sector net borrowing for the fiscal year 2010/11 to 148.5 billion pounds from 149 billion pounds. Its forecast for 2011/12 was 117 billion pounds, slightly up from the 116 billion forecast in June.

In 2012/13, government borrowing is predicted to fall to 91 billion pounds, 2 billion pounds higher than the June forecast.

(Editing by Susan Fenton)