Part of the reason for UK’s slow economic growth has been the austerity plan put into place by the government in 2010. The UK austerity plan was introduced as a method to reduce a massive debt that had reached record levels after the 2008 global financial crisis. Besides cutting public spending and services, the UK government have also implemented a new wave of tax increases as part of its austerity plan. Although these methods can be effective in reducing the risk of a debt crisis, it also has the ability to hamper economic growth.

According to the Chief Economic Adviser for the Confederation of British Industry Ian McCafferty, “The recovery continues to be choppy and lacking in vigour. Expansion in certain sectors is being offset by weaker performance in others. What remains striking is how little we expect the pace of growth to accelerate in 2012, and that it will be far less robust than we'd normally expect in the second and third years of a recovery.”

In the wake of the recent economic forecasts, the austerity plan has once again been called into question. John Evans, general secretary at the Trade Union Advisory Committee to the OECD warned that the UK austerity plan could be a “vicious cycle, not a virtuous cycle.” Prominent economist Nouriel Roubini also expressed concern over the likelihood of stagnation and double-dip recession.

On their part, the UK government does not dispute the fact that the austerity plan will hurt in the short term. However it hopes that these methods will create sustainable economic growth in the long run. Media tycoon Rupert Murdoch has backed the UK government plan by declaring that, "strong medicine is bitter and difficult to swallow. But unless you stay the political course, you will be neither robust nor popular.” OECD’s secretary general, Angel Gurria has also urged the UK government to “stay the course”, arguing that, “inaction would have been much worse.” 

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UK’s GDP Forecast

The UK was the 6^th largest economy in the world in 2010 according to GDP (current prices) and the 8^th largest in the world according to GDP (PPP). In 2010, UK’s GDP (PPP) was US$2.172 trillion or 2.982 percent of the world’s GDP.

UK’s GDP (PPP) will grow at a fairly consistent rate over the next five years. From 2012 to 2015, UK’s GDP (PPP) is expected to increase by 5.283 percent to 5.518 percent annually. By the end of 2015, UK’s GDP (PPP) is expected to reach US$2.608 trillion.

Similarly, UK’s GDP (PPP) per capita is also likely to experience slow but steady growth annually during the same period. In 2010, UK’s GDP (PPP) per capita was US$34,919.51, a 2.218 percent increase from 2009. Between 2011 and 2015, UK’s GDP (PPP) per capita will grow annually from 2.772 to 4.297 percent. In 2015, UK’s GDP (PPP) per capita will be the 22^nd highest in the world, coming in at US$40,545.95.

UK’s Unemployment Forecast

UK's population in 2010 was 62.222 million, of which 28.988 million were employed - giving UK the 4th highest labour to population ratio in the world

However, unemployment remains high in the UK, and is likely to remain so in the wake of the UK’s austerity plans. The UK government has warned that nearly half a million jobs could be lost in the public sector alone as the government continue its cut on public spending.

In 2010, the unemployment rate in the UK was 7.841 percent, a slight increase from 2009’s 7.453 percent. This number is expected to improve in 2011, though any improvement will be minimal at best. UK’s unemployment rate will continue to improve marginally for the next couple of years until after 2013. By 2015, unemployment in the UK is expected to drop by more than a percentage point from 2013 – falling from 7.396 percent to 6.474 percent.

UK’s Inflation Rate & Current Account Balance Forecast

UK’s current inflation rate is threatening to sabotage the UK’s government austerity plans to keep interest rates under control. In fact, one of the key reasons why economic forecasts for UK had to be slashed down by the IMF for a result of higher than expected inflation.

According to Justin Knight, head of European rate strategy at UBS, “What has been driving UK yields is the prospect or risk of inflation, which has to be priced in. There are distinct concerns about inflation."

In 2011, the UK’s inflation rate (average consumer price change) is expected to be 4.2 percent – more than double of what the UK government had targeted (2 percent). However, the IMF predicts that the UK economy will recover sufficiently enough for inflation rates to hit the government’s target of 2 percent by the end of 2012. The inflation rate should remain constant until 2015 at least.

In 2010, The UK had the sixth largest current account balance deficit in the world, behind the US, Spain, Italy, France and Brazil. Although the UK’s austerity plan has been designed to reduce debt, UK’s current account balance is expected to drop to a record low of negative US$60.051 billion by the end of 2011. The effect of UK’s austerity measures are only expected to kick in by the end of 2012, where the current account balance will drop to negative US$48.861 billion. This represents an 18.634 percent improvement. By 2015, UK’s current account balance deficit will drop to negative US$34.403 billion.