UK set for years of slow growth but Hammond vows to do better

By William Schomberg and David Milliken

LONDON (Reuters) - Britain's sluggish economy looks set for more weak growth stretching out over the next five years, according to official forecasts announced by finance minister Philip Hammond on Tuesday as the country heads for Brexit.

But Hammond, delivering a half-yearly update on the government finances, said Britain's budget forecasters expected the economy to expand by 1.5 percent in 2018, up only a touch from a forecast of 1.4 percent in November even though the world economy is growing strongly.

Growth forecasts in 2019 and 2020 were kept unchanged at 1.3 percent and were cut for the following two years, according to the independent Office for Budget Responsibility, which judged a recent pick-up in productivity to be temporary.

Hammond told parliament that he was aiming to prove the forecasters wrong.

"That's the OBR's forecast, Mr Speaker, but forecasts are there to be beaten," he said.

Hammond stressed he had to keep on bringing down Britain's public debt levels but tried to focus on the positives, highlighting the OBR's prediction of a return to growth in spending power for households in early 2019.

He also used his speech to attack the plans of the opposition Labour Party to spend and borrow more.

"There is indeed light at the end of the tunnel," Hammond said in parliament, turning his gaze to John McDonnell, Labour's would-be chancellor of the exchequer.

"But we've got to make absolutely sure it isn't the shadow chancellor's train, hurtling out of control in the other direction, towards Labour's next economic trainwreck."

Britain's economy has slowed sharply since the vote in June 2016 to leave the European Union.

Worryingly for Hammond, the OBR said the economy was already running slightly faster than it could do without generating excessive inflation, even as it lagged behind its historic growth rates.

Earlier on Tuesday, the Organisation for Economic Cooperation and Development said Britain would grow more slowly than all the other Group of 20 leading economies this year, leaving it lagging behind the global recovery.

Sarah Hewin, chief economist for Europe at Standard Chartered, said the latest forecasts announced by Hammond looked sub-par: "The surprise for many people is how little has changed... it's a pretty weak trajectory."

LESS BORROWING

Despite the slow growth seen ahead for Britain, the government is on course to borrow 20.3 billion pounds ($28.4 billion) less in cumulative terms between 2017/18 and 2022/23 than it predicted in November.

The budget deficit for the current 2017/18 fiscal year has been cut to an estimated 45.2 billion pounds from a forecast of 49.9 billion made in November, Hammond said. That was less of a cut than many economists had expected.

Britain has lowered its annual borrowing from 10 percent of gross domestic product in 2010, when it was reeling from the global financial crisis, to just over 2 percent now.

Some lawmakers in Hammond's Conservative Party have urged him to take advantage of the progress in reducing the deficit to spend more on an over-stretched health system, the military and other services.

They want to check a rise in support for the Labour Party which has promised to end the Conservative squeeze on public-sector pay and invest more in infrastructure.

Hammond has said he might be able to allow a bit more public spending later this year but he stressed in his speech on Tuesday that Britain's public debt remained too high.

He said he was on course to meet a target of bringing the debt-to-GDP ratio down each year, saying the OBR saw it falling to just under 78 percent of GDP by the 2022/23 fiscal year from an expected peak of 85.6 percent now.

Hammond also looked comfortably on course to meet another target to cut the budget deficit, when adjusted for the swings of the economic cycle, to 2 percent of GDP by the 2020/21 financial year.

He said the OBR's new forecasts showed he was likely to have 15.4 billion pounds of headroom below that target, up slightly from November's forecast.

That would give the government the possibility of increasing spending shortly before the next national elections due in 2022.

($1 = 0.7161 pounds)

(Additional reporting by Andy Bruce and Sujata Rao; editing by David Stamp)