Forecasts hint at public sector and property as sources for future growth

Gordon Brown launched a robust defence of the economic forecasts on which the Government's spending plans depend, saying Britain has weathered the recession better than its main competitors.

The Chancellor delighted the Labour benches by declaring he would hit his growth target for this year despite criticism that he had been too optimistic in the Budget seven months ago.

And he insisted that Britain was on the brink of solid, above-trend economic recovery over the next two years.

He said that GDP growth for this year would come in at 2.1 per cent, towards the lower end of the range of 2 to 2.5 per cent he forecast in April.

"When I made our forecast the Opposition said that it was not just incautious and wrong but 'a deliberate misrepresentation' of Britain's economic prospects and not to meet it destroyed credibility," he said to laughter and cheers from his own side.

"I can report to the House that not only have we met our forecast - but cumulatively since 2000, Britain's economic growth has been stronger than Japan, the euro area and the USA."

But he stuck to his bullish forecasts of strong growth of 3.0 to 3.5 per cent - which is above the UK's long-term trend of 2.75 per cent - in both 2004 and 2005. He has published a forecast for 2006 for the first time, indicating a slowdown to between 2.5 and 3 per cent. This leaves him as one of the most optimistic forecasters in the City, where economists are looking for growth of just 2.7 per cent in each of the next two years.

Given that the Treasury assumes growth at the lower end of the range when putting together the public finances, this equates to a total shortfall of £6bn over those two years - if the City is right.

The figures came as little surprise in the City, where analysts had not expected Mr Brown to cut his growth forecasts at this stage.

But beneath the surface the Treasury has been forced to carry out some major revisions to take account of the increasingly unbalanced pattern of growth.

Rather than a "Goldilocks" scenario - not too hot, not too cold - of a recovery in business investment, manufacturing and exports offsetting a slowdown in consumer demand, the forecast is for more of the same.

The revival in exports, which was seen at Budget time as growing by 8.5 per cent next year, will now expand by a more modest 5.5 per cent. Manufacturing will grow 2 per cent rather than 2.5 per cent while hopes of a 5 per cent surge in business investment has been scaled back to 3 per cent.

By contrast, investment in housing has been revised up and public sector investment remains strong.

"It is interesting that the Chancellor has acknowledged that much of the increase [in growth] will come either from the public sector or property," said Simon Rubinsohn, the chief economist at Gerrard fund managers.